I would like to expand my portfolio to some US stocks (Nasdaq). I have about R200 000 to start with and will not need it managed because I have some trading platform experience and a selection of stocks I would like to invest in for the long term. As a South African, what would the recommended platform be to buy Nasdaq stocks through?
In order to advise or guide anyone who wants to embark on a rather risky venture that involves actual trading of shares, bonds, exchange-traded funds or even currencies, it would be advisable to consult with this individual properly. Unfortunately, it has become difficult for even professional traders to maintain themselves in the current market environments, where volatility remains at very uncomfortable levels that even surpass the top benchmarks measured just prior to the financial crisis.
Too often have we seen inexperienced investors taking emotional decisions based on hearsay or very limited factual information.
Even experienced fund managers and professional traders are getting their calls wrong often, with success ratios of 60% considered to be rather exceptional.
One only has to go back to the African Bank, Steinhoff, EOH and even the recent Tongaat Hulett share correction scandals that have caught highly knowledgeable and experienced teams of experts off guard to understand the risks associated with trying to manage your own portfolio. In US markets there have been drastic share price corrections in some top pharmaceutical and biotech companies, and even favourites like Apple, Tesla and Facebook have experienced some rather severe price corrections lately. Lehman Brothers remains the biggest casualty the markets have seen and must continue to be seen as a warning to all that no company is too big to fail.
If we consider that R200 000 only converts to around $13 000 at an exchange rate of R15 to the dollar, then you are severely limiting your stock choices. A simple calculation means that only about 13 Google shares could be purchased, or 65-odd shares in Apple as an example. That creates a massive concentration risk in any portfolio and will always require dedicated attention.
There is also the question of costs to consider when trading such low volumes. One might find that this additional cost layer could actually force certain trading preferences and eventually completely distort the original long-term investment strategy. Custodial fees may further erode cash positions, which again limits potential active-trading strategies and may even trigger forced sales to recoup custodial fees. Trading as a professional may further create another tax issue due to your potential status being changed to an active or professional trader.
Another concern is the fact that you mention the Nasdaq. Consider the fact that Apple, Alphabet, Microsoft, Amazon, Google and Facebook constitute more than 42% of the Nasdaq 100 index, compared with around 25% of the S&P 500 index. It may be that you are considering binary options, thus actually wanting to trade a specific index only or even options on stock. This is an even higher risk venture, as it requires rather dedicated focus and skill – and, in many cases, pure luck. One only has to consider the enormous impact the ‘trade war’ debate had on the S&P, Nasdaq and the Dow Jones, which also spread like wildfire to all other developed and emerging market indexes during October 2018, to understand how market conditions can destroy a potential long position in a matter of seconds.
The fact that you wish to follow a long-term strategy actually makes the case stronger for introducing a more balanced and diversified portfolio of offshore funds to your portfolio. Through a selection of funds, you would be able to diversify the capital into various indexes across various demographics, shares and even selected currencies, bonds and property. All the well-known companies, as well as some emerging financial giants from the Asian markets, can be accessed much more cheaply this way, rather than having to buy them individually and paying a trading cost, as well as having to paying a custodian a regular fee to safeguard them. There is also the additional benefit of gaining access to the diversified intellectual capital and experience of top fund managers relatively cheaply.
Changes in investment strategies may be recommended and discussed with a qualified team of analysts and advisors on a regular basis. Switches between funds do not automatically trigger any trading costs, as would be the case when buying and selling different shares, and switching smaller positions could be done more cost effectively than through a normal share trading portfolio.