Should I Buy US Tech Stocks?

In yesterday’s article published in the Sunday Times Invest section, “Should I buy US tech stocks”, the editor highlighted that The Straits Times reported in July - online brokerage Tiger Brokers found that?89.5% of its Singapore users have been trading in US stocks in 2024.

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In addition, based on a study done by OCBC Bank in April, young investors?picked Tesla as the top choice for their first trade in this year,?which was a marked shift from local bank shares that 25- to 35-year-olds chose in 2023 and 2022, and Singapore Airlines in 2021.

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American stocks, especially the household technology names like Apple, are mentioned far more frequently among young people she talked to than Singapore ones. Together with Tesla, they formed two of the “Magnificent 7” stocks – Apple, Alphabet, Microsoft, Amazon, Meta, Nvidia and Tesla. They have drawn considerable attention in recent years due to their outsized impact on the stock market.

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These stocks are seen as indicators of the technology sector’s health and are favoured by investors for their growth potential and market leadership. Some of these companies are also at the forefront of artificial intelligence technology, which has been a key investor focus in recent years.

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But while the US stock market can be wildly exciting and alluring, there are things that investors, especially young ones, should note before they take the plunge. Therefore, let us use today’s 211th week of our #SundayTimesRecap learning series, to learn what they are:

1. Beware of just relying on social media information. A quick search of “what stock to buy right now” on TikTok can yield a dizzying array of information, with people recommending anything from Apple to Disney and Lululemon, which are listed on the Nasdaq or the New York Stock Exchange (NYSE). But the videos don’t come with additional information on why a certain stock is undervalued or what dividends it will pay.

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Therefore, be mindful of what you read from online social media and approach information from these platforms with caution, because they may have unverified or misleading information, or have rapid spread of success stories or popular sentiment that can generate strong emotions that compel investors to make impulsive decisions.

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Be careful “whispers” as well – where rumours, hearsay or following the crowd online can lead you to park money in something you have not properly researched.

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2. Should you just buy the Magnificent 7 then? It is important to note that this group of stocks is highly concentrated. All are based in the US and belong to the tech sector, which leads to a lack of diversification in terms of geography, sector and asset class, posing concentration risk to investors.

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Diversification, by spreading investments across different countries or regions and industries, is recommended. In this way, you can mitigate risk and buffer against unexpected events or shocks. This approach also helps protect against adverse currency fluctuations and region-specific risks.

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Another challenge is that stock valuations are very high in the US market, particularly in popular sectors like technology. When valuations are high, there may be limited room for further price appreciation, and the risk of a price decline is higher if corporate earnings fail to match expectations.

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One other risk is that investing in US stocks also involves currency risk for Singapore investors. Changes in exchange rates can affect the value of investments when converting back to the Singapore dollar.

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Overall, the US stock market offers many opportunities, but knowing the risks before going in?is important.

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3. Know yourself. This is the fundamental rule of thumb for investing in anything. This means learning what risks you are willing to take on, as well as the sort of goals you are investing towards and the time horizon.

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While mature markets like the US tend to exhibit comparatively stable growth and are viewed as lower risk, do take the time to learn more about sector-specific risks. For example, the factors that affect the performance of technology companies listed in the US could be very different from those of real estate firms.

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You can also ask yourself if you’re a conservative or aggressive investor.

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Conservative investors are risk averse and prefer safer investments that prioritise capital preservation, while aggressive investors are willing to take more chances in pursuit of greater returns. They are comfortable with market volatility and may invest in high-risk assets like individual stock options, and alternative investments.

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Investors who want to dabble in US stocks should also know that they might need a strong stomach for volatility. Swings are driven by factors such as economic data, corporate earnings reports, geopolitical events and overall market sentiment. This volatility can result in rapid price fluctuations, which increase market uncertainty for investors.

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The rise of high-frequency and algorithmic trading also amplifies volatility in the US stock market. These automated systems rapidly execute trades in response to market trends, news events or other triggers. So, price swings can occur more frequently and with greater intensity.

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And before jumping into anything, defining investment goals is crucial, as different objectives may require varying investment amounts. All investments involve some risk. As with all tactical investments, ensure that your longer-term core investments are put in place to meet fundamental goals before allocating to higher-risk products.

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4. How to start. Do proper research and start off on the right foot. First-timers into foreign markets can focus on blue-chip companies with a strong track record of earnings. Do your homework to make informed decisions, and not base your investment choices on word of mouth.

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Some factors to consider: The company’s performance and financial health; the industry trends; the overall economic environment; the company’s management and valuation; and potential risks.

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Lastly, it is crucial to consider the long-term perspective and growth potential of the investment. If you are not well versed in stock picking or are perhaps more cautious, dabbling in exchange-traded funds (ETFs) can be the way to gain exposure to foreign stocks.

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ETFs offer trading flexibility, portfolio diversification and risk management benefits. They often have lower costs compared with mutual funds.

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In summary, the world is an investor’s oyster now, with online platforms, mobile trading apps and a whole wealth of options that make trading overseas possible while situated in Singapore. You can now look further afield to the US markets, armed with an understanding of the possibilities but also awareness of the risks.

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To add on to your knowledge of investing in US tech stocks, join my teammates and I at our next webinar, “The Lifetime Income Streams”, on Monday 12th August 2024 at 8pm.

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We will share simple investing tips to help you create monthly income that can last you for the rest of your life. You will feel more confident in managing your money matters as most of our attendees can testify.

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Register for the zoom link – select “Invited by Victor” - here: https://www.thelifetimeincomestreams.com/tlisvip

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To reach me over my personal Telegram chat, click here: t.me/victorfong

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