Why do we have to invest and especially why invest in the Stock Market and not other channels?
1. Why do we need to invest?
Normally, the basic financial journey of a person’s life will go through two stages. The first stage is to build a personal financial foundation through spending management activities. Thanks to effective spending management, we will know how much we spend and how much debt we need to pay (basically, everyone has debts that need to be paid, right?).
After paying off all debts, we will move on to the journey of accumulating assets. Once we have accumulated enough assets, we will move on to phase 2, which is the investment phase. Investing will be favorable and develop very well if we can build a solid financial foundation.
Like a high-rise building, the foundation is extremely important. The time it takes to build the foundation is equal to (or sometimes longer than) the body of the building. Only when there is a solid financial foundation can the investment building stand firm for a long time.
However, after building the financial foundation, we only have the foundation. If we want to have an investment house, we must have methods to build the floors quickly and safely.
The methods here are investment methods and the levels here are investment channels. But basically, not all investment methods and investment channels are suitable for all of us. Each of us has different financial capabilities, different financial management methods and different risk tolerance.
Below I will analyze all the most popular investment channels today, and at the same time prove that the stock market investment channel will be the safest and most suitable investment channel for the majority of people.
Figure 1: Description of current investment channels
2. The most popular investment channels today
2.1. Savings deposit
This is the most basic, simplest and safest investment channel. This is the method with the lowest risk level, even almost no risk if you choose banks in the BIG4 group. And because of the low risk, the profit rate of this investment channel will not be much, mostly in the range of 4% to 6% / year.
However, we all know very well that cash will be heavily affected by inflation . Inflation is the factor that drains the value of our cash, it does not show immediately but in the long run, it will drag down the value of our money.
For example, if you keep 15,000,000 VND in cash for 30 years, with an average inflation rate of about 4% / year, after 30 years, that number will become 48,650,963 VND , meaning your money has depreciated 3 times.
If in 2020, with 15 million VND you could buy 10kg of rice, then after 30 years, with the same 10kg of rice, the quality of the rice has not changed but you have to spend more than 48 million VND to buy the same amount of rice.
Figure 2: Average inflation rate and its impact on currency
People often use bank interest rates to evaluate their investment activities, in the style of “even worse than bank interest rates” . For example, when you invest in opening a coffee shop, you work hard for a whole year but the profit is only about 10%, you console yourself that “it’s a bit difficult to start a business, but when people start to know you, the profit next year will be different” .
And suppose that in the second year, the profit level is only around 10%, at this point we can evaluate this as an ineffective investment activity, because just depositing in the bank, without doing anything, already has 6% / year (here is just an example of comparing the profit in other investment channels compared to the most basic investment channel, which is saving, not considering growth factors, business situation, loss-bearing strategy, passion for starting a business, etc.).
In addition to looking at deposit interest rates, we should also look at lending interest rates, especially bank lending rates for businesses. For example, at present, lending rates for businesses are around 7%.
Why do we need to pay attention to this number?
That is, there are some projects calling for investment with profits (rate of return) up to several dozen percent per year. In these cases, we must immediately ask the question “If the rate of return is much higher than the lending interest rate, why doesn’t the business owner borrow from the bank to invest but instead calls for capital and then does business together, why bother?”
You can understand that, if you do it yourself, you just need to pay off the bank debt and that’s it, but if you do it together, you have to share the profits until you stop doing it. If you can’t answer this question, you should stay away from investment projects like this, because there is a high possibility that this is a scam.
2.2. Investing in real estate
Vietnam is a developing country, so from a macro perspective, the real estate market will continue to grow a lot. However, to invest in the real estate market, you must ensure two factors: enough money and enough information .
The factor of having enough money is easy to see, because the value of a real estate is not small, so if you buy it all at once, you will need a large amount of capital. In addition, the interest rate for loans to buy real estate is quite high. If you calculate the interest rate for loans to invest, the story of real estate investment will become very complicated, requiring investors to have very careful calculations about their personal financial situation, the market, the ability to sell products, etc.
The more complicated factor is the information factor. Although the real estate market in Vietnam is developing very well, it has a limitation, which is a serious lack of information. If in the US, you want to search for information about a certain real estate, you can go to Zillow.com or Trulia.com , in Australia, there is Domain.com.au or Realestate.com.au .
In Vietnam, there are similar websites, but most of the data on those websites is inaccurate, so it is difficult for investors to have enough information to make decisions. This is not necessarily the fault of those websites, but this is a characteristic of Vietnam.
Real estate agents in Vietnam tend to post very attractive properties, but when customers contact them to inquire about that property, they will offer other properties. Basically, they use those channels for advertising, not necessarily using those websites as an accurate information channel.
In addition, real estate policies and laws in Vietnam are still quite complicated, and the management and licensing of real estate in Vietnam is still quite loose. There have been many cases where investors have encountered problems when buying and selling real estate due to lack of information about the real estate (such as planning information, information about the project investor, information about disputes, etc.).
From such reality, it leads to the fact that small investors like us will lack information to make accurate investment decisions.
There is another factor, this factor is more personal. Personally, I think that real estate investment is not really good. Real estate should only be leverage, not a real investment channel. The basis of real estate investment is that you buy it and wait for it to increase in price and then sell it, and that will create many negative consequences for the economy and society.
Figure 3: An article about inflated land prices. @Spiderum
To understand this issue, imagine you are a person with good finances, that is, you have enough money (maybe because your family is rich or you have saved for many years through your own labor). One day, through an acquaintance (that is, you have enough information ), you learn that the government is going to build a train running through your district, a poor district.
Combining the two main factors I just mentioned, that is, you have enough money and enough information, you decide to invest in real estate in the district you are living in. You spend 1 billion VND to buy 10 plots of land, each plot costs 100 million.
Because it is a poor district, there is a lot of vacant land so the land price is very cheap. After buying, you wait, after a year the land price increases from 100 million VND per plot to 150 million VND, some people ask to buy but you do not sell. The second year, the price increases to 250 million VND per plot, you still do not sell to anyone.
Then in the third year, the fourth year, and the fifth year, the land price increases to 500 million per plot, so you sell it. So you earn 5 billion, 5 times more profit than the beginning. You earn money completely legally, without cheating anyone.
But your way of making money is problematic for the economy. First, for 5 years you hold that land and refuse buyers, you have wasted that land resource for 5 years. For 5 years, people who need land for housing have not been able to live there, shops, stores, cinemas, grocery stores could have been built there.
So instead of being used to contribute to the economy and provide housing for many people, 10 plots of land have been lying bare for 5 years, overgrown with grass.
The second problem is that your land holding, also known as speculation, and that of many others has created a shortage of land, resulting in high land prices, or what we often call “real estate fever”. High land prices also push up house prices, making it impossible for low-income people to own a house.
Rich people like you get richer, while poor people find it hard to escape poverty. But it’s not your fault at all .
If I invest in real estate, personally, I only invest in agricultural real estate or real estate that can be rented out to build factories, or to do business to create value for society, not short-term investments like speculation.
2.3. Investing in business projects
This is a fairly common form of investment, which is you pool your capital with friends to open a company in a certain field, or simply open a clothing store, a cafe, etc. This form of investment also has many good points. The most obvious advantage is that you can both invest and live with your passion, and do what you like every day if you invest in the field you love.
In addition, if you have effort, expertise and a little luck, in the long run, this form of investment can bring you a high and stable source of income.
The downside of this form is that you must have a certain expertise, maybe your expertise must be relatively high. Because no one wants to invest in a business with someone who just sits around and enjoys everything.
If you just want to invest money and wait for the sweet fruit, you need to have a lot of money. Some startups only need finance from diamond investors, but that number is very small, most startups still need the support of investors to develop the business together.
This form of investment also has many risks, it is statistically shown that the rate of early bankruptcy of Start-ups is not small. Not to mention that having to cooperate in business with others will require you to have interpersonal skills, must have certain relationships, otherwise it is easy to lead to conflicts between founders, leading to the disintegration of the Start-up, not only losing money but also losing friends.
2.4. Retirement regime
If you work for a company or organization, this is a program that any employee in Vietnam is required to participate in. The retirement system in Vietnam will include three types of insurance: social insurance, unemployment insurance and health insurance.
Freelancers (i.e. those who do not work for a company) can also participate in this pension scheme by voluntarily paying insurance premiums, but as far as I can see, except for health insurance, the number of people participating in this voluntary social insurance is quite small.
If you work for a company and have a labor contract, every month, the company will deduct 10.5% of your income (including 8% for social insurance, 1% for unemployment insurance and 1.5% for health insurance) and deduct 21% from the company (including 8% for social insurance, 1% for unemployment insurance and 3% for health insurance) to pay these types of insurance for you.
If you pay regularly every month, when you reach retirement age, you will have a certain amount to use for your retirement.
The advantage of this type of investment is that it is quite safe, because it complies with state regulations, and if you work for a company, the company is required to pay for you, you are required to participate. If the company does not pay insurance for you, you have the right to sue the company, and then, in addition to the insurance money that the company must pay back to you, the company will also be fined a very large amount, so few companies dare to avoid this.
Figure 4: Overview of how social insurance is calculated in Vietnam
But the downside of this investment channel is the same as when saving, which means it will be heavily affected by inflation. In addition, because it has to deduct up to 21% of your total income to pay insurance for you, some companies will circumvent the law by only symbolically recording your income on the labor contract, while the real number will not be shown on it.
Of course, the amount of insurance you pay when declared as company expenses will be much lower, the company will pay more taxes but that number will be less than 21%. And the company will have to explain and negotiate with you, if you agree, this form will be applied, you will also pay a lower amount for your insurance, in the short term it seems beneficial but in the long term, the one who loses is still you.
In addition, if you want to use this money, you must pay regularly until retirement age before you can withdraw it. If you withdraw it earlier, the amount you receive will be quite low, and the retirement age in Vietnam is 55 for women and 60 for men, a pretty big number.
2.5. Gold storage
This is an extremely popular and favorite investment channel of the majority of Vietnamese people, from the time of “our grandparents” until now. The advantage of this investment channel is that it is quite simple, suitable for the majority of investors, from amateurs to professionals. Even the elderly know how to invest in gold.
But the downside of this investment channel is that it is extremely volatile. Similar to real estate, gold is a finite resource, so in the long term, its value will certainly increase. But its short-term volatility is very difficult to predict, it depends on many factors, both domestic and foreign.
Not to mention the current gold and silver market is very complicated, if you are not careful, you will most likely encounter cases of buying fake gold or poor quality gold.
2.6. Investing in virtual currency
This is a new investment channel that has emerged in recent years and is quite popular among young people, especially those who are passionate about technology. In terms of investment, I have not seen the advantages of this channel.
On the downside, virtual currency contains many risks, specifically:
- The value of virtual currency is very volatile, even the volatility of virtual currency is complex and occurs in extremely short periods of time (can be calculated in seconds).
- Currently, virtual currency has not been officially approved by state agencies, all investment activities using virtual currency have potential legal risks.
- Cryptocurrency is so easily manipulated, it is so easily manipulated that just one tweet or one status can move the entire market.
2.7. Invest in special, high-value products
This is a more personal and enjoyable investment channel. In this investment channel, investors will buy valuable items at the present time but will have much higher value in the future (such as supercars, watches, jewelry, etc.), or items that increase in value over time (such as antiques, unique works of art, etc.).
The advantage of this investment channel is that you can enjoy the items before you sell them. In addition, you can also invest according to your own personal interests, hobbies, and hobbies. The disadvantage of this investment channel is that you need to have a lot of capital, because these items are not cheap at all.
2.8. Investing in securities
This is also the main issue that I will share in this series. This is an investment channel where investors will use knowledge to exchange for money and vice versa. The advantage of this channel is that your investment source will not be affected by inflation.
The stocks you hold in the long term will definitely grow and bring you a good source of income (I will prove this in the next parts of the series). In addition, you do not need too much capital to start investing in the stock market, some good stocks are only at 20,000 to 25,000 / share.
Investing in stocks is similar to investing in business. If you own shares of a company, you will become a shareholder of that company, which means you co-own the company with the founders. And you don’t need to do anything, you don’t need to communicate or have relationships with anyone, the company already has experts in their field, always looking for ways to develop the company day and night.
And as the company grows, the value of the shares you hold will also increase. For example, when you buy Vingroup shares, you can confidently say that you are a co-owner of Vingroup and you are a shareholder with Mr. Pham Nhat Vuong, which sounds cool (of course, being a founding shareholder is a different aspect and will have higher benefits).
Another advantage of investing in stocks is that it will create value for society. Unlike investing in real estate and then waiting for the price to increase, investing in stocks, although similar in form to investing in real estate (also buying and holding for the long term), its impact on economic and social development is completely different.
When you buy shares of a company, you are giving your money to the company to do business, you hold the shares and the company holds your money. The company will use your money to produce and create value for society, promoting the economy.
The more shares you buy, the more money the company has to grow. If the company does well, the company will grow, leading to an increase in the stock price, the company’s stockholders will make a profit, and they will also grow. At the same time, society has many good products, society will develop, the economy will also develop, and many parties will develop.
If you hold real estate, only you will develop, things like economy, society, business will have difficulty developing, and when things around you cannot develop, it will also greatly affect you.
The only downside to this investment channel is that you are required to have knowledge, otherwise you will definitely lose money.
Thank you for reading my sharing, hopefully it has brought more or less useful value to you.
- Sky -