The Truth About US Stock Investment: A Comprehensive Guide to Pros, Cons, and Smart Strategies

In recent years, investing in the US market, which drives global economic growth, has garnered significant attention among Japanese investors. However, just as every investment has its bright and dark sides, US stock investment also carries potential risks alongside its immense appeal.

Are you thinking, "I'm interested in US stocks, but I'm not sure about the specific pros and cons," or "I want to start investing wisely after understanding the risks"? This article, from a financial investment expert's perspective, thoroughly explains the advantages and disadvantages of US stock investment. We will provide specific strategies and precautions to help you make investment decisions with confidence.

The Allure of US Stocks: Unmissable Advantages

There are clear reasons why US stocks are chosen by investors worldwide. Here, we delve into their main advantages.

1. Growth and Innovation Driving the Global Economy

The US market is home to numerous world-leading technology companies, exemplified by GAFAM (Google, Apple, Facebook, Amazon, Microsoft), and innovative business models. These companies continually create new value through ongoing research and development and M&A, driving global economic growth. Diverse growth opportunities across various industrial sectors are a significant attraction for investors aiming for long-term wealth creation.

2. Consistent Shareholder Returns and Dividend Culture

US companies are known for their strong commitment to shareholder returns. Particularly, companies known as "dividend aristocrats" or "dividend kings," which consistently increase their dividends, demonstrate stable cash flow and business foundations, making them attractive options for investors focused on income gains. Share buybacks are also common, often contributing to rising stock prices.

3. Abundant Information and High Liquidity

The US market is the world's largest financial market, with a wealth of corporate information and market data publicly available. While much of it is in English, the environment for access is well-established. Furthermore, due to its immense market size and high trading volume, it boasts high liquidity, making it easy to buy and sell whenever you wish. This is a crucial advantage, especially for institutional investors and short-term traders.

4. Diversification Benefits for Your Portfolio

Japanese stocks and other asset classes (bonds, real estate, etc.) may exhibit different economic cycles and market trends compared to US stocks. By adding US stocks to your portfolio, you can achieve geographical and currency diversification, potentially reducing overall risk while stabilizing returns. For Japanese investors, who often have a bias towards yen-denominated assets, holding dollar-denominated assets also helps hedge against currency risk.

5. Currency Diversification by Holding Dollar-Denominated Assets

In an environment of fluctuating Japanese Yen value, holding dollar-denominated assets is highly effective for diversifying currency risk. During periods of yen depreciation, the yen-equivalent value of dollar-denominated assets increases, which can help protect against a decrease in overall asset value. From a long-term perspective, currency diversification is a vital strategy for asset preservation.

Potential Risks of US Stock Investment: Disadvantages You Should Know

While there are attractive advantages, US stock investment also comes with disadvantages that require attention. Understanding and properly addressing these is key to success.

1. Currency Risk

Since US stocks are traded in dollars, fluctuations in exchange rates directly impact investment performance. For example, even if stock prices rise, a stronger yen (weaker dollar) can reduce profits when converted to yen, or even result in losses. Especially in short-term trading, exchange rate fluctuations can be a significant factor.

2. Information Access Barriers and Time Differences

Key corporate information and market analyses are often provided in English, which can be an information gathering hurdle for investors less proficient in English. Additionally, the time difference between Japan and the US can make it challenging to track real-time market movements and make prompt decisions.

3. High Volatility and Price Fluctuation Risk

The US market, while offering high expectations for innovation and economic growth, also tends to have relatively higher market volatility. Growth stocks, in particular, can experience rapid surges or drops in price due to positive or negative news, carrying the risk of significant unrealized losses in a short period. Depending on the investment target, you might experience more intense price movements than with Japanese stocks.

4. Complexity of Tax System

Profits earned from US stock investments are subject to Japanese income tax, plus a US withholding tax (10% on dividends). To avoid double taxation, you must complete a "foreign tax credit" procedure during your final tax return. While using a NISA account (Japanese tax-exempt investment program) can exempt profits from Japanese tax within the non-taxable limit, the US withholding tax still applies. Understanding and properly processing these tax systems can feel complex for beginners.

5. Difficulty in Selecting Investment Targets

With thousands of listed companies in the US market, selecting promising stocks is not easy. Investing in individual stocks requires deep knowledge and time for company and industry analysis. It's crucial to avoid being swayed by superficial information and to select investments based on your own investment philosophy.

Smart US Stock Investment Strategies

To maximize the benefits and manage the disadvantages, the following strategies are effective.

1. Principles of Long-Term, Regular, and Diversified Investment

• Long-Term Investment: By investing over several years to decades, without being swayed by short-term market fluctuations, you can benefit from compounding and overall market growth.
• Regular Investment (Dollar-Cost Averaging): Investing a fixed amount each month reduces the risk of buying at a high price and averages out your purchase cost.
• Diversified Investment: Instead of concentrating on specific stocks or sectors, diversify your risk by utilizing multiple stocks, sectors, and even index funds or ETFs. Geographical diversification (Japanese stocks, US stocks, emerging market stocks, etc.) is also important.

2. Thorough Information Gathering and Risk Management

Before investing, thoroughly research the company's financial health, industry trends, and macroeconomic developments. Clearly define your loss tolerance and invest within a comfortable range. Make sure to implement strict risk management, such as setting stop-loss rules.

3. Addressing Currency Risk

While currency risk cannot be completely eliminated, regular investment using dollar-cost averaging can mitigate the impact of exchange rate fluctuations. From a long-term perspective, holding dollar-denominated assets itself acts as a hedge against a weaker yen and stronger dollar, providing diversification benefits. If necessary, consider financial products with currency hedging features.

4. Utilizing the NISA System (for Japanese Investors)

Japanese investors can utilize NISA accounts (Tsumitate NISA, Growth Investment Frame) to make profits tax-exempt up to a certain amount. This can reduce tax burdens and enable efficient wealth creation. However, it's important to note that US withholding tax still applies.

[Affiliate Location: Information on opening a brokerage account (NISA compatible)]

Conclusion: Manage Risks with Smart Strategies for US Stock Investment

US stock investment offers significant advantages: high growth potential, consistent shareholder returns, abundant information and liquidity, and diversification benefits. However, it also presents undeniable disadvantages such as currency risk, information gathering challenges, high volatility, and tax complexity.

To maximize these benefits and properly manage the drawbacks, a smart investment strategy based on the principles of "long-term, regular, and diversified investment," thorough information gathering, and decisions aligned with your investment goals and risk tolerance are indispensable.

The US market offers great potential for your wealth creation. We hope this article helps deepen your understanding of US stock investment and assists you in making more informed investment decisions. All investments are made at your own risk; always gather the latest information and make your own judgments.