Should I be investing in the US stock market?

Question

Should I be investing in the US stock market? 
What are the pros and cons?

Answer

G’day Elizabeth, Great question.

First though, some disclosures: I am a financial advisor (general advice), my company does sell subscriptions to US stock picking services (that’s not an ad, but could subconsciously impact my view) and I own US-listed companies and ASX-listed ETFs that include US companies. I’ll try to answer honestly and without bias, but those disclosures should help you think about any subconscious biases — or, if I was dodgy, my incentives — that might be in my reply, below. Also, none of what follows is personal advice, just some general thoughts.

So, top-line: As you’d expect, given I already invest directly and indirectly in US companies, I reckon it’s a great idea. Why?

Two key reasons: Quality and Diversification.
Let’s do each in turn: Quality Australia makes up only 2% of the world’s stock markets. It’s statistically unlikely that we have 100% (or 60% or 40%) of the world’s best companies. Don’t get me wrong — I’m a proud Australian. But I’m also a student of statistics :) If a property investor only wanted to look at streets starting with M, we’d think them silly. If a share investor only wants to look at Australian shares… I think they might be missing out. It’s not an absolute thing, though — you can do very well just investing in Australia. I just reckon that there’s an opportunity to look more broadly for the best investments out there. The cons of that are the time and effort in having a wider ‘universe’ of companies to analyse and consider, and a (slightly) more complex portfolio to manage, which might make US investing not worth the time, hassle or effort. One high quality compromise might be an ASX-listed ETF that was comprised, in whole or part, of US companies.

Diversification It’s tangentially related to the point above, but investing in the US offers diversification on three key grounds: industry, currency and geography. US markets offer access to high quality companies in industries we just don’t have the same representation of, at scale and quality, here in Australia, including technology and consumer products, among others. Currency diversification is obvious :) And geographically, not only are we talking United States, but many US-listed companies are global in reach and scale. The cons: US companies are traded in US dollars, usually in roughly opposite timezones, and it’s slightly more complex to buy and sell. And when doing so, you might find the combination of (for example) an attractive share price and an unattractive exchange rate. So I have a longer time horizon for my US shares, knowing I want to be able to wait for both to be attractive before selling. (Dollar cost averaging is my friend when I’m buying). I hope that helps.
Bottom line: US investing is very worthwhile, in my view, either directly or via an ASX-listed, broad-based, low-cost ETF of US companies.

Kind regards, Scott Phillips

Answer

Hey Elizabeth,

Really depends on what you’re trying to achieve through your investing, but my take on this is that there are already a heap of Australia-based ETFs and managed funds that invest directly into US stocks, you can get the US exposure without going through the admin and reporting around having to trade directly in the US.

Hope this helps.

Ben

Answer

Hi Elizabeth,

That is a very good question.

Although I trained as an equities analyst and worked in the institutional stock broking industry for 15 years, I am no longer a registered adviser, so my perspective comes from professional knowledge and experience running my own portfolios since 2008.

I think the hardest concept for retail investors is that don’t have to invest everywhere, so the trick is working out where and why you want to invest in different stocks, themes (sectors) or countries, and there is so much to chose from.

When it comes to investing for the longer term, we are told to diversify our exposure to different stocks or markets, and they will all have different levels of risk attached to them. This means at one end of the scale you have lower risk developed markets such as the US and Australia and higher risk, such as emerging markets. This means you potentially can make more money in the higher risk markets periodically but you can also potentially lose more money.

On balance as investors we want to benefit from stocks/countries/sectors that have favourable economic backdrops and tailwinds or what we call secular growth opportunities (think technology, decarbonisation for example). We want to invest in companies that can grow both earnings and dividends (particularly when inflation and interest rates are rising).

The reason why the US stock markets are attractive is that they are the largest in the world, capturing both US GDP growth and international GDP growth (think the major technology stocks such as Apple, Microsoft. Meta and Alphabet). They provide a much greater depth of stocks to more sectors than other countries.

The Australian share market is very small globally (around 2%) and is very heavily exposed to the financial stocks and the resource stocks (about 50% of the total value – market capitalisation). This means that Australia is a very cyclical economy (when property and mining are doing well, our economy does well). There are of course other stocks and great companies in the healthcare, technology and media sectors, but the size of the companies and the choice are substantially lower than the US stock markets.

So the reason why the US can or should be on an investors radar goes down to the fact there are many great companies that are good long-term investments that provide an alternative to Australia. For example your superfund would invest in a multitude of asset classes and overseas.

It goes back to the saying «don’t put all your eggs in one basket».

If you decide to invest in the US, the next question/s you should ask yourself is how much time and effort do I want to put in?
On balance there are lots of ETFs to chose from that you can buy in Australia, or you might have the time and desire to invest directly into a few stocks. For many Australians they tend to buy the big technology companies or Tesla because they are iconic giants and we all know them.

I diversified into the US stock markets in 2015 because I just didn’t want to own the banks and the mining stocks. But also I spend time reading, listening and researching the companies that I invest in and that takes time. Not everyone can or wants that approach.

But on balance the reason why I think US stocks remain interesting is that many of the companies are at the cutting edge of technological innovation, they provide diversity and choice away from Australia and the investing backdrop is supportive of strong corporate governance, transparency and liquidity for investors. The US economy remains a global driver of economic growth and will remain a very important destination for investors.

I hope this helps Elizabeth.
Cheers
Danielle Ecuyer

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