Make sure you understand what you’re investing in.
Investor’s worldwide love to be able to discuss stocks that have had extraordinary performances over a short period of time. Over the past couple of decades in particular, the technology sector has been at the forefront of some incredible investment returns.
As much as it’s nice to get caught up in the romance of investing in businesses that are riding this technology wave, there is always a high level of risk that investors might get it wrong. Below we will discuss the most recent example of this technology phenomena in Australia – the WAAAX stocks.
WAAAX Stocks Defined
Almost every major economic power has a technology stock bellwether. The most well-known is the FAANG stocks which are listed on the US stock market and include the following household names: Facebook, Amazon, Apple, Netflix, and Google. Changes in these stocks help indicate the health of the tech sector in the States.
The Australia’s version of the FAANG stocks lies in the acronym WAAAX – which is made up of: WiseTech, Appen Ltd, Altium Ltd, Afterpay Touch Group Ltd and Xero Ltd.
Why people invest in WAAAX
The major drawcard of investing in the WAAAX stocks is the high level of return they have offered investors over a short period of time. Earlier this year, these stocks made global news as prices leapt up 200% which easily outpaced tech stocks in the US and Europe.
With the cash rate in Australia currently sitting at a record low with indications of a further rate cut, along with generally low interest rates worldwide, investors can be quite attracted to a group of stocks that have had such significant returns over a short period of time.
Risks associated with the WAAAX stocks
Although many investors find rewards investing in the WAAAX stocks, the high level of reward is partnered with a high level of risk. According to the Financial Review, “WAAAX stocks have rewarded backers with their relentless ascent, but growth names have shown a tendency to deliver painful draw downs when negative events arise.”
From a fundamental viewpoint, some of the WAAAX stocks are trading at 150 times their earnings. To put this into perspective, ANZ is currently trading at a price that is just above 12 times their earnings. This shows the expectation the market has for these stocks to be able to keep significantly growing their earnings.
To invest or not to invest
Before you rush out and decide to jump on this huge technology wave by purchasing stocks such as the WAAAX stocks, it is important you separate the optimism from the facts. An investor needs to carefully consider the fundamentals of the individual businesses and ask themselves if they believe the company has the capacity to increase their earnings in line with market expectations.
The other crucial part of deciding whether to invest in these types of stocks is to consider your risk profile. Put simply, a risk profile measures how comfortable a person is with investing in growth assets that can experience fluctuations in prices. Investments such as the WAAAX stocks may not be appropriate for a person with a low risk tolerance as they can be uncomfortable with their volatile nature.
We work with clients across Australia to help them put together investment strategies that meet their needs and that are appropriate for their individual risk profile. Contact one of our Financial Specialists to help you through the investment process to ensure you have an investment portfolio that is right for you.