Should I switch from stocks to bonds now?

According to experts, the bond market is currently not suitable for individual investors due to limitations in assessing the debt repayment capacity of businesses.

I have nearly 500 million VND invested in stocks. During the previous uptrend, I made a profit of about 10%, but now the market is fluctuating so I am very discouraged.

I see quite a few companies issuing bonds with good interest rates, some up to 13-14% per year. Should I sell some or all of my shares to switch to bonds?

My Hanh

One of the bond contracts purchased through the bank. Photo: Anh Tu — One of the bond contracts purchased through the bank. Photo *: Anh Tu*

Consultant:

I sympathize with your experience in the stock market and this is also the common situation of most individual investors today, especially new investors.

In fact, the long-term stock market is still an effective channel for investors to build personal assets. Statistics over the past 50 years in most countries around the world show that stock investment is still one of the best profitable channels. However, in the short term, stocks are often considered a risky investment channel due to their large volatility, reflecting strong psychological factors and market nature (mark-to-market).

With two very different aspects as above, investors need to understand the market clearly, understand their purpose of coming to this channel to have a suitable investment method. In particular, taking advantage of short-term fluctuations of the market is very difficult and risky, even for professional investors, so it is not suitable for non-professional individuals who do not have much time to analyze, trade, and continuously observe the market. Many statistics show that the rate of individual stock investors losing money after 2 years of investment is up to more than 85%, even though the stock market is profitable in the same period. Statistics from the Taiwanese or Vietnamese markets show similar results. In other words, for most individual investors, the appropriate method is still long-term investment with a balanced portfolio.

An alternative that you can offer is corporate bonds. First of all, investing in corporate bonds is similar to lending to a business, receiving periodic interest (coupon) payments and returning the principal amount on the bond maturity date. The key is to assess the ability of the issuing organization to pay interest and principal on time, and this is the decisive factor to ensure that the investor's expectations of principal and interest above become a reality.

In developed markets, the debt repayment capacity of the issuer is assessed by reputable credit rating agencies such as Moody's or S&P, making the market more transparent and investors better able to identify risks. In Vietnam, the corporate bond market is still young, not very transparent and lacks reputable credit ratings.

Therefore, investing in corporate bonds in Vietnam is risky and not suitable for most individual investors. Recently, we have heard many cases of issuing organizations defaulting on payments and causing losses to bondholders (bondholders) due to the limited ability of individual investors to assess the debt repayment capacity of enterprises. Accordingly, the current Vietnamese corporate bond market is only really suitable for professional investors.

Based on your sharing, I think you are looking at the stock market from a short-term perspective, which is not an appropriate approach for individual investors. Meanwhile, you are attracted by the good returns that corporate bonds bring but do not fully understand the potential risks. This is the common view of most non-professional investors that we have consulted before. Based on the information you have shared and assuming that the amount of 500 million VND can be invested long-term and does not greatly affect life, I make the following recommendations.

First of all, you should not switch your stock portfolio to bonds but change your approach to investing in stocks to a longer-term perspective. Vietnam will remain one of the leading growth economies in Asia over the next five years, according to the International Monetary Fund (IMF)'s October 2023 outlook report.

The stock market is at a historically good valuation (market P/B is at 1.64 - 21.5% lower than the average of 2.09 times). Accordingly, investing in stocks at the current stage will help you build assets thanks to the strong growth potential of the economy and the stock market in the next 3 years.

To overcome the psychology of investing such as feeling "depressed", in addition to looking at the long term, you need to build a diverse and sustainable investment portfolio. If you cannot do it yourself, you can choose to invest in professionally managed open-end funds with a diverse portfolio. In addition, in case you want to invest directly in stocks, you need to be advised by personal finance experts, investment consultants to help determine the right portfolio for you and accompany you throughout the investment process.

Investing in stocks has never been easy and patience always brings results in the end. Hopefully the above sharing will help you find the right investment direction.

Doan Minh Tuan
Head of Investment Research and Analysis
FIDT Investment Consulting and Asset Management Company

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