Grand slam-winning tennis players don't always make the most amazing shots. They hit the fewest terrible shots. Their success lies just as much in skill as it does in discipline. Real-life investment success mirrors this principle. Sometimes, more than chasing returns, avoiding critical mistakes can make or break our investment strategies.

We all have the tendency to make instinctual and behavioural missteps— it's part of human nature. However, as investors, it's important to recognize that these instinctive human reactions can be particularly damaging if left unchecked. During bear markets, they can erode the most thoughtfully curated portfolios, leaving a tangible impact that can take years to recover from.

Today, we find ourselves amid a period of market volatility that will test investor discipline. In such times, it’s important to revisit core investing principles that center around long-term wealth creation and preserve our ability to make rational, forward-looking decisions.

4 Mistakes to Avoid in a Bear Market

In challenging times like these, it’s crucial to avoid emotional pitfalls. Here are four common investor missteps and how to guard against them:

Mistake #1: Panic

Panic in the markets rarely occurs in isolation—more often than not, it is the consequence of unchecked euphoria that preceded it. So, we have to manage panic today by managing euphoria yesterday. In other words, staying grounded during euphoric times is what ultimately prepares portfolios—and investors—for inevitable corrections and shields us from the panic.

Bear markets are fundamentally a correction of the excesses that occurred during the preceding bull market. This ongoing—perhaps, necessary—moderation in the markets follows a significant and sustained period of euphoria spanning over four and a half years. As we approached the peak of this cycle in September 2024, rational caution was replaced by a sense of invincibility — a near-complete disregard for risk and danger.

When euphoria envelops us, we cease to fear or even acknowledge the chance of principal loss. Our sole worry is that there are individuals out there whose stocks are appreciating at a rate surpassing ours. This is the hallmark of the “Euphoria Zone,” where FOMO becomes contagious. Yet, it’s crucial to remember: neither the business cycle nor the market cycle has ever been repealed, and they never will be.

During such times, the most prudent course of action is disciplined diversification and a steadfast commitment to patience. A consistent relationship exists between the peak of the euphoria during the bull market and the depth of panic-induced surrender during the moderating markets. It is evident that those who previously embraced the euphoric experience now express significant concern regarding the continuation of positive trends and drivers that propelled the markets forward during the (not so long ago) upward surge in markets. Recognising this, it is crucial to avoid excessive euphoria in order to prevent significant emotional and financial dislocations when the tide turns, which it has temporarily.

In a growing economy such as India, all market declines are temporary interruptions, not structural breakdowns. The market, driven by a fast-growing economy, is in a state of almost permanent ascent. Panic represents a fundamental manifestation of diminished confidence in future outcomes.

This time is no different.

Mistake #2: Performance chasing: Speculation in disguise

One of the most common pitfalls during periods of market volatility is performance chasing—selling an underperforming fund in favour of one that has recently outperformed. While this may appear to be a rational adjustment, it is, in essence, a speculative behaviour rather than a sound investment strategy.

At its core, performance chasing is driven by trend-following—the belief that what has performed well recently will continue to do so. This behaviour aligns more closely with speculation, which relies on price momentum, than with true investment, which is rooted in valuation, fundamentals, and long-term potential.

It is important to understand this difference. Long-term investing is about identifying undervalued opportunities and aligning decisions with well-researched objectives. On the other hand, speculation is reactive, emotionally driven, and focused on short-term goals.

During bear markets, when emotions run high and market signals are mixed, the temptation to chase returns can be especially strong. However, this is precisely when we need to avoid speculative behaviour, especially with the core capital. Reacting to short-term performance can compromise the integrity of the investment strategy and increase the risk of permanent capital loss.

Staying focused on long-term goals and being consistent, not reactive, is the foundation of successful investing.

Mistake #3: Prioritising high yield over long-term net returns

There may be a desire now to reallocate capital from public equities to high-yielding instruments such as performing credit or venture debt. However, regarding both risks and net returns, the asset class may not serve as a clear and efficient substitute for public equities.

In public equities, a temporary decline in prices does not constitute a capital loss unless the security is sold. Conversely, in private debt, there exists a nearly binary risk of capital loss in the event of a default.

The growth in AUM and the number of launches in the private debt sector have outpaced the growth in investible opportunities. This has led to risks in origination, yield compression, deterioration of portfolio quality, and increased portfolio commonality. To compound these concerns, many of the funds currently lack a demonstrable exit track record, making future outcomes even more uncertain.

Private debt also suffers from inherent asymmetries—higher expense ratios and significant tax inefficiencies. While gross returns may justify higher risk, the net returns—after accounting for taxes and expenses—fail to adequately compensate investors for the additional risk incurred.

As such, while private debt may play a complementary role in a well-diversified portfolio, it should be approached with caution and used judiciously. This category does not serve as a clear substitute for public equities when evaluating total holding period net returns on a risk-adjusted basis. After accounting for taxes, equities have demonstrated significantly better returns and are likely to remain the preferred investment vehicle for long-term total net returns.

Mistake #4: Not having a plan and a functioning governance mechanism in place

Our environment serves as a continuous triggering mechanism, significantly influencing behaviour and warranting attention. We often overlook the necessity of systems, habits, reminders, and strategy, instead relying on willpower, motivation, and memory to guide us.

This is where Investment Policy Statement (IPS), a clearly defined decision-making architecture, and an operating manual play a crucial role in governing our behaviour. It is essential to establish and pre-program our responses during stable periods to effectively navigate turbulent times and minimize significant errors. This proactive method helps us see problems as opportunities, since our emotions often get in the way of our logical thinking in times of trouble, making rational advice mostly ineffective.

During market turmoil, emotional impulses often cloud judgment, rendering even the most well-intentioned advice difficult to follow. A well-constructed governance framework helps cut through that noise, turning confusion into clarity and reactivity into opportunity.

Final thoughts

The current market environment offers valuable lessons. It presents an opportunity to strengthen not just portfolios, but belief systems and behavioural architecture—allowing investors to respond more effectively in both euphoric and stressful market conditions. Importantly, it also reinforces a timeless truth: the seeds of panic are often sown during periods of euphoria. Disciplined diversification is the only sustainable way to ride these waves, enabling investors to face future downturns not as victims, but as well-prepared participants.

Finally, for your portfolio’s integrity as well as your peace of mind, it is crucial to tune out the noise—particularly the constant commentary from financial news channels. Instead, stick to your diversification strategy, stay focused on fundamentals, and if you can maintain conviction, use this period to accumulate quality assets at attractive valuations.