Risk control in equity investment

Amateur investors should set up a personal strategy to settle the risks in stock investment.

Many investors, which especially includes amateur investors (F0) should set up a personal strategy to settle the risks in stock investment.

Multi-type risks

The Vietnam Stock Market ended 2020 year with a new high level of transaction value, caused by the wave of amateur investors’ entry into the market. Most of the new retail traders invest in stocks without much knowledge about the market as well as investment activities. They often follow the consultancy stockbrokers and benefit the continuous pump of the market, so many of them are likely to suffer a big loss when the market went on a downward trend.

Besides, investing in stocks untimely could put investors at risk. This is often triggered as the investors experience a Fear Of Missing Out (FOMO) in the market, which could also happen to experienced traders. To overcome the barriers of knowledge, psychology, and decision-making progress, amateur traders' confidence is often strengthened by a large number of investors entering the stock market, as well as by the consecutive gaining sessions of the market. It is not a coincidence that financial experts usually alert the signs of a top- reaching market when retail investors massively make the entry into the market.

The value trap is considered a challenge for not only new investors but experienced investors as well. “A value trap is a stock or other investment that appears to be cheaply priced because it has been trading at low valuation metrics, such as multiples in terms of price to earnings (P/E), price to cash flow (P/CF), or price to book value (P/B) for an extended period”. Therefore, the standards of fundamentals are underestimated or misvalued. The price of those stocks increases continuously while there is no change in the fundamentals of the firms. In some cases, the firms have poor performances.

Buying and selling a stock with the belief that it will continue to appreciate in value or that the stock is undervalued, is different for each investor. The lack of concern about the intrinsic value of a business leads to buying stocks when their prices are high, causing investors to suffer losses.

In particular, the irrational, emotional investment and panic sell-off also result in big losses for individual investors, excluding the use of excessive financial leverage would also cause investors to suffer great losses when the market is strongly volatile.

Moreover, unusual international geopolitical factors, such as North Korea or Iran’s nuclear missile testing, armed conflicts in the Middle East, US-China trade war, monetary policy movements of Central banks on increasing/decreasing interest rates, implementing quantitative easing (QE) also make the global stock market volatile, causing many investors to panic, sell off stocks, therefore, bearing big losses as a result.

A long-term strategy needed

The fact that the Vietnam stock market is going to hit 1,400 points has brought up many challenges for investors. Psychological barriers and trading strategies in which many hidden risks could lead to losses.

The benchmark of 1,400 points is considered as a strong resistance for VN-Index

According to the statistics of the efficient investment in the US, European, and Vietnam stock markets, the most effective investment strategy is to buy and hold undervalued stocks for a reasonable period. Even though the time of purchasing stocks is inappropriate, the long-term investment in stocks always obtains better results than the short-term and continuous stock trading.

The stock market will fluctuate repeatedly so investors need to make wise decisions about which methods and philosophies are important and should be chosen. Otherwise, an appropriate approach to mitigate the risks also plays an essential role in stock investment. Accordingly, the investors are recommended to thoroughly analyze the businesses’ financial "health", business strategy, business prospects... to conduct the long-term stock investment in outstanding enterprises with expected profit.

Right now, the benchmark of 1,400 points is considered as a strong resistance for VN-Index, but it will overcome this level sooner or later. No matter how volatile the Vietnam stock market is, the long-term uptrend of the market is indisputable. Therefore, investors should be consistent with their long-term investment strategy, avoid psychological disturbance ahead of the short-term impacts, especially need to use appropriate margin leverage...