Investing in US stocks: Key things to know
Whether it is global portfolio diversification or reduced investment risk, international stocks present a world of opportunities.
Despite that, only around 15% of Australian investors have direct investment in international shares, according to the latest ASX Investor Survey. When asked about the investment intentions for the next 12 months, 17% of investors surveyed by the ASX said they are planning to invest on international exchanges.
Here, we present a Q&A with investing expert and author Danielle Ecuyer* about how to buy US stocks from Australia, key factors to keep in mind and common mistakes to avoid.
Q: How can Australian investors invest in US stocks?
A: Australian investors have three ways to invest in US stocks. For the enthusiasts who love to conduct their own research, you can invest directly into the US stock markets and buy the companies that spark your imagination and are part of your everyday life, such as Apple, Facebook, Alphabet (Google’s parent), Netflix and for some, Tesla.
Most share trading services offer some avenue to buy US stocks directly, so the essential aspect for you is to keep an eye on the costs for both trading the stocks and buying/selling US dollars.
If you like the idea of investing directly into the US stock markets, but don’t know where to start, then the extensive array of ETFs available makes for investing in your favourite themes very easy.
Alternatively, you may prefer to invest in just technology companies via an ETF favourite such as QQQ (Invesco’s flagship ETF that tracks the Nasdaq 100 top companies).
The choice of ETF products is considerably more extensive in the US, compared to Australia. This includes the actively managed ETFs from the innovation and technology ‘Queen’, Cathie Wood, CEO and Founder of ARKInvest or the recently listed actively managed ETF from Gerber Kawasaki (GK) that invests in quality stocks across nine themes for the 21st century.
If that sounds like hard work and you are looking for an easier avenue, then you can always invest indirectly via ETF products, both index and thematic ETFs, listed in Australia. The list of available ETFs is growing by the month, offering Australian investors better choice. Some Australian investment managers provide exposure to US stocks through their international offerings such as the Magellan Global Fund.
Q: Why should one consider investing in the US stock market?
A: There are several reasons to invest in the US stock markets. Firstly, they are the largest and most liquid in the world and have outperformed the ASX200 over not only the last 12 months but in the last five years; S&P500 +103%, NASDAQ Composite +195% and the ASX200 +39%.
The USA remains a leading country to invest in innovation and new technologies that our changing the world and delivering outstanding returns. Experts always say ‘diversify, diversify, diversify’. US markets offer one of the best diversification avenues with exposure to not only the global economy via the technology giants (mentioned above) but also the domestic economy and the emerging technology giants such as Zoom, Square and Crowdstrike, just to name a few.
Q: Could you highlight some of the risks to consider when investing in the US stocks?
A: The main risk is probably currency fluctuations between the Australian and US dollar, that is why some investors may prefer to buy the Australian listed ETFs with exposure to US stocks that are currency adjusted.
However, on balance, with so many low-cost, easy to access trading platforms available and the opportunity to profit from the investing opportunities from major secular growth themes in the next decade such as electric vehicles, cybersecurity, ecommerce, digitalisation and robotics; the opportunities outweigh the risk.
Q: What are the key factors new investors should keep in mind?
A: According to a Charles Schwab survey “15% of US stock market investors got their start in 2020” and are referred to as GI or Generation Investor. Many of these newer investors (51% millennials) have been cited as the Reddit or Robinhood crowd (from the social media and zero cost trading platform, respectively), and named as investor vigilantes that have created some eye-popping moves in stocks such as AMC and Gamestop.
Newer investors need to be aware that the weight of money or liquidity in a low interest rate environment can create pockets of speculative bubbles in not only the WallStreetBets (Reddit) stocks but also other thematic stocks such as Tesla.
Q: What are some of the most common mistakes that investors make?
A. Managing emotions is one of the most challenging issues for investors. How do you react when you buy a stock and the price falls after you have done lots of research? Are you right or wrong? Do you sell the stock or buy more?
This goes to the heart of the most common mistake that investors make, confusing the price of a stock with the underlying company that they have bought into. When you buy a share or stock, you are buying just a fraction of the underlying company.
The price at which the stock trades at is reflective not always of the value or the worth of the company, rather a multitude of factors that feed into the price, such as sentiment, the macro-economic influences or just traders/algorithms moving the price.
Investing is as much about knowing yourself and your risk tolerance as knowing the stock. For example, do you panic and sell your shares when the market falls or do you tend to like to follow the trend and end up buying at the top of the market, when the price is high? Equally you need to know and understand the companies you are investing in, so when the price moves you have a better understanding of whether the company is a buy or a sell.
If investing directly in stocks is not for you, then investing in ETFs is a good alternative. However, ETFs often scoop up a large bucket of stocks and you may inadvertently be investing in companies you do not want to own. If you are more inclined to invest with an ethical or an ESG screen to omit or include certain companies or sectors in your portfolio, I strongly suggest you do some research into the companies that are included in the ETF to match your investing disposition.
Q: What’s your last bit of advice?
A: Lastly but not the least, is learning when to sell a stock. Most of us have more than one company that has consistently disappointed with profit downgrades or the next best technology or mining project that has failed to meet expectations. When you know your stocks, you can make the sometimes emotionally challenging decision to sell and invest the money in a winning stock. Never forget the opportunity cost of holding too many losers and remember your winners can win for years.
*Danielle Ecuyer has worked in senior positions at some of the world’s most prestigious investment firms, advising global investment companies. She now applies her skills and experience to manage her own investment portfolios. Since the success of her first book, Shareplicity, Danielle has been a sought-after market commentator. Danielle’s second book Shareplicity 2: A guide to investing in US stock markets is available now online and at all good bookstores.
Danielle will be presenting a webinar - Why everyone should have exposure to US stocks in their share portfolio'. - for AIA members on August 3, 2021. To attend and for more information, please visit the webinars page.