How to Invest in the USA as a Foreign Investor?
The U.S. has long been viewed as a relatively safe haven for investment dollars. Foreign investors from around the world like the liquidity, transparency, and generally stable economy that America offers as compared to other global alternatives.
Interest in U.S. investment runs the spectrum from global corporations and institutions to sovereign wealth funds. In fact, the United States is the largest single recipient of business foreign direct investment in the world with inflows that surpassed $277 billion in 2017, according to the U.S. Department of Commerce. High net worth individuals (HNWIs) and families also view the U.S. as an attractive market to build personal wealth.
Individuals can choose different entry points into the American investment marketplace, including stocks, bonds, and mutual funds, as well as alternative investments such as real estate, art, oil, or timber. The starting point for many investors is the U.S. stock market, which currently valued at about $34 trillion, is the largest in the world.
Whether an individual investor chooses to work with a financial advisor to provide guidance or is a do-it-yourselfer, the first step is setting up a brokerage account where individuals can buy and sell stocks, bonds, mutual funds, index funds, and exchange-traded funds. Setting up a brokerage account is easy. It can be done online or in-person with a financial advisor. It is usually free to create an account, although different fees that apply to transactions and services depending on the type of account selected. Some of the basic information required to set up an account include:
- An individual must be 18 years old.
- Clear copy of current passport
- Original copy of a utility bill with current home address
- W8ben Tax Form
- Bank information to fund the account
Building an Investment Portfolio
Working with a financial advisor or opening your own brokerage account provides a gateway to start building an investment portfolio. Brokerage accounts allow individuals to buy and sell different investment products. There are thousands of different choices of individual stocks, corporate bonds, and mutual funds. Frankly, it can be overwhelming. There are some simple keys to navigating the investment market:
Understand and define your financial goals: Your financial goals will help guide investment decisions. Do you want to build wealth over the long-term, mid-term or short-term horizon, such as to save for retirement, pay for college education for your children or invest for a specific purpose, such as buying a home? Or do you need investments that generate income?
Know your risk tolerance: Investors do have choices that come with very little or no risk, such as buying U.S. Treasury notes, CDs, or municipal bonds backed by government guarantees. Stocks, such as Apple, Google or Coca Cola, generally carry a bigger risk and offer the potential of a bigger return to account for that risk.
The Importance of Portfolio Diversification
Buying each individual investment is a stepping-stone to creating a larger investment portfolio. Building a portfolio of investments allows an investor to spread out risk across different financial products, sectors, and geographic regions while generating a more stable blended return. For example, if investors only buy stocks in Google, they face a big risk if that one company fails to perform. Likewise, if an investor buys only energy stocks, that presents a big risk if there is a downturn in the energy sector. One simple guideline follows an old saying, don’t put all of your eggs in one basket.
Most investment portfolios are comprised largely of stocks, bonds, and cash. Modern portfolio diversification strategy also recommends investing in alternatives that move counter-cyclical to stocks to provide greater overall stability and protect wealth from swings in volatility. That volatility has been very visible in the last year with one stock market index, the Dow Jones Industrial Average, rising or falling by 300-500 basis points per day in some cases.
Typically, real estate markets do not correlate directly with stock and bond markets. In addition, real estate has other advantages such as providing tax advantages in terms of depreciation, as well as providing a hedge against inflation. Real estate has become a standard allocation in investment portfolios among both institutions and individual investors.
Investors have many opportunities to invest in real estate through mutual funds or publicly traded real estate investment trusts (REIT), as well as direct investment in real estate. REITs and direct real estate investments have very different risk/return profiles and aim to achieve different investment goals. Individuals can access both REITs and private equity real estate investments through a registered investment advisor, such as CanAm Capital Management.
As with any investment, it is important for investors to make sure that investment in real estate directly or indirectly through REITs fits with their risk tolerance and investment goals.