Dig your investor claw into any country

I can trade from Miami orange juice futures to trading the weather.

Financial markets have become so accessible and it is no longer the playground for just an elite few.

Of course, one cannot possibly know everything about everything and I have found that many investors and traders tend to do rather well when they find their niche product or instruments.

Today I thought I’d share with you a slightly different angle and probably a much easier way of trading offshore markets; let’s call it “my Niche”.

When it comes to trading overseas, I have chosen to trade an entire index as opposed to try and stock pick.

Stock picking can be extremely difficult if you don’t know much about what drives a company’s share price in a market you don’t know enough about.

The S&P500 Index in the US for example, is made up of around 620 stocks.

Now try and imagine doing analysis on this many companies before making a trading or investment decision.

Not only is extremely labour intensive but stock picking also increases your risk.

Having your cash spread across a whole index reduces risk.

For example, if you only owned five stocks and your Google shares plummet 40 per cent after some terrible results, that one stock alone would destroy your little offshore portfolio of five stocks.

The effect of a few stocks falling is far less when trading an entire index because your risk is spread across the entire market that you are trading.

This is exactly why I choose to trade an index over individual stocks.

When trading offshore, your account is held in a currency other than rands, so simply by having an offshore trading account, you have hedged out local currency risk.

Trading an entire index as opposed to finding individual stocks to buy reduces your risk even further while still retaining the potential of profiting in dollars or euros.

So you see, it doesn’t really matter to me if Volkswagen gets a whopper of a fine for cheating on their fuel emission sensors and share price falls 25 per cent.

While I know an imploding Volkswagen share price will drag the German DAX Index lower, I know there are 29 other stocks to cushion the blow and buy me the time I need for that share price to recover.

I have also found that indices tend to trend better than individual shares.

Indices have a habit to follow each other.

Positivity in the Dow Jones Industrial average usually filters through to Europe and London’s FTSE and vice versa.

Trading indices won’t necessarily give you maximum gains or shoot the lights out but that is the price every trader pays when they avoid risk. The upside for any South African though, is that your returns are measured against a very weak rand so it is a bit of a trade-off.

Either way I look at it, I would rather make my profits in dollars, pounds or euros any day of the week rather than in our pitiful rand.

There’s some food for thought.

Also read:

The enigma around September stocks

Refine the way you think about oil

Is purchasing property a good investment?

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