How to start investing in US and European stocks?

The modern stock market provides investors with ample opportunities for investment and capital accumulation. Modern American and European stock markets have quite advanced tools for buying assets (short-term and long-term investment). To start investing for a private investor, it is enough to open your personal brokerage account with an American or European broker, go through the verification and registration procedures and start investing.

But, in today's unstable and changing world, investing is associated with high risks of capital loss, turbulence and instability. Recently, many investors have also begun to worry about high inflation around the world. Rather high inflation in the US and the Eurozone in 2022-2023 led to a loss of real purchasing power of capital.

In this regard, the investor needs professional financial and investment planning services in order to correctly calculate the target return and investment horizon. Each investor has his own risk sensitivity, his own goals and a certain initial capital.

In order to achieve a certain target (amount) in the future, the investor needs to make a forecast, calculate the expected target return, and also take into account the impact of inflation throughout the entire investment horizon. Otherwise, at the end of the period, the result of the investor will be rather insignificant, and he will not be able to acquire what he was hoping for!

How to start investing in stocks and the U.S. stock market?

The fundamental steps to begin investing involve making the decision to become an investor and expressing the desire to invest. Initially, it is essential to understand the distinction between investing and trading, avoiding confusion between short-term or intraday trading and investing (medium-term or long-term, such as in the stocks of American companies).

Next, you need to determine the currency for investment and comprehend the expected inflation level in that currency since your investments will naturally decrease annually. More precisely, the nominal amount of investments may increase, but the purchasing power of your capital will decrease by the inflation rate. This understanding is crucial for any novice investor.

The subsequent step involves opening an individual brokerage account with an American or European broker, completing the broker's system registration, and undergoing all KYC and AML procedures during the account registration. To initiate investments from Ukraine, you need to transfer funds through a bank to your open account with the broker. This can be done several times a year, replenishing your investment capital monthly or quarterly to purchase assets.

The brokerage platform allows investors to buy stocks, funds, shares of well-known American companies and hold positions in the portfolio for an extended period according to your investment strategy. You can read about what an investment strategy is here.

• How to create a long-term portfolio?
• How to select stocks for a long-term strategy?
  
• How to reduce the risk of an investment portfolio?
  

Why Long-Term Investment Planning is Crucial?

How Investment Horizon Impacts Investment Returns?

Every investor must remember that the long-term period comes with its substantial advantages and real benefits for investors. To ensure your capital truly works for you, it's essential to invest in stocks and funds on a long-term basis, aligning with your risk tolerance.

Long-term investment has the potential to significantly amplify investment returns as compound interest generates annual returns on both the invested capital and the income from the previous period. It is crucial not to withdraw capital from the portfolio but rather reinvest and diversify the portfolio appropriately.

Historical Returns of U.S. Stocks (S&P500 Index)

When considering investment in American stocks, funds, or the broad market index (S&P500 Index), investors need to understand and have realistic expectations regarding the future returns of their investments. This means that by investing in a specific strategy, instrument, or asset portfolio, your portfolio will have its unique returns and portfolio risk. This should be kept in mind.

The historical return of the S&P500 Index over a 10-year horizon is approximately 10.88% annually, considering dividend payments. While this may seem good (or possibly too low for some), it is not a guarantee that your portfolio will achieve similar or higher returns. As you may already understand, it is much more complex than it appears at first glance.

Why Investors Need to Consider Expected Inflation?

If historical returns showcase how well your portfolio performed in the past, future returns can significantly differ for several reasons. For instance, if your portfolio yielded, let's say, 12% annually over 10 years, you need to subtract historical inflation since the real purchasing power of money actually decreased by 2.5-3% annually.

So, what does this mean? Subtracting 12% - 3%, your actual annual returns are now 9-9.5%. Moreover, inflation might be higher than 2.5-3% annually. There were years when U.S. dollar inflation was 4.6% in 2005, 5.5% in 2008, 5.4% in 2021, and 9.1% in 2022. Disregarding this single factor, your real investment results will significantly differ, and over 10 years, inflation could reduce your real capital by 25-30%. How does such disappointment sound to you?

Hence, it is crucial to annually adjust your investment strategy to the inflation rate, rebalance the portfolio, and align the risk and expected return parameters of the portfolio to the required levels. Additionally, it's essential to remember that companies go bankrupt, and their stocks decline in value, so timely measures are needed, such as replacing assets with potential for long-term growth.

We haven't touched on tax optimization and the macroeconomic impact on your portfolio yet. In certain economic stagnation periods, assets may no longer generate the required returns according to your investment strategy. It is highly important to take corrective actions in a timely manner and adapt the investment portfolio and its structure to future economic upheavals, provided you can foresee them in advance.

Key Steps in Building an Investment Portfolio

Primary Criteria for Constructing Investment Portfolio (Stocks and ETF Funds)

The criteria for building a portfolio are not numerous: investor risk tolerance, target expected portfolio return, investment horizon, expected inflation, strategic portfolio structure, sectoral portfolio structure, and macroeconomic context.

Additionally, it's crucial to have a clear understanding of your portfolio's risk parameters and expected returns. What will be the Beta, Standard Deviation, Expected Return? When forming an investment portfolio for the next calendar year, corresponding calculations need to be made to balance risk and expected returns. It's vital not to exceed systematic and unsystematic portfolio risk, as risk tolerance cannot withstand significant fluctuations in portfolio value.

You must understand the boundaries you won't cross. Which sectors will you avoid investing in, what company capitalization won't you purchase? For instance, if a company's financial indicators deteriorate, will you close the position or keep the asset in the portfolio, and for how long?

Which U.S. Economic Sectors to Invest in and Why is it Important?

As mentioned earlier, the sectoral structure of the portfolio should be determined in advance and be part of your investment strategy. The portfolio will include companies from specific economic sectors, but which sectors and what maximum weight these sectors will have in the investment portfolio?

Investors need to understand the current and future macroeconomic context to decide on the weight of sectors in the portfolio. Which specific economic sectors will feel better or worse, or remain neutral under given conditions? As you understand, all of this is linked to your investment strategy and risk and return tolerance.

How to Properly Select Company Stocks for Your Portfolio?

To select stocks or funds for your investment portfolio, investors need to establish a set of criteria for stock selection. What specific parameters will be involved in the selection?

For example, these could be: market capitalization, country, PE Ratio, EV/EBITDA, Debt/Equity, ROE, Sector, Beta, Gross Margin, Payout Ratio. Depending on these parameters, you'll need to set up a stock screener and select the required number of assets for further detailed analysis.

Investors also need to remember that depending on the investment strategy, parameters for selecting stocks may change. Perhaps the portfolio will include not only stocks but also funds (ETF/Mutual Funds), rules established by the investor, depending on what exactly they want to achieve in the end, be it a "rocket" or a "locomotive," or a "reliable off-road vehicle" (figuratively speaking)!

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You can find out more about investing in the US and European stock market on the main page of our website. Please make a request for a consultation on the service Investing in the US and European stock market, and our managers will contact you at the next working time!

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