Invest In Us: The Human Advantage

Foreign direct investment (FDI) plays a significant role in the US economy, with the country offering a stable, welcoming, and predictable market for foreign investors. The US government facilitates foreign investment through its Invest in America programme, which supports job creation, innovation, and competitiveness. The country's strong infrastructure, low taxes, and access to the world's most lucrative consumer market also make it an attractive destination for investors.

Within the US, stock market investment is a popular choice, with 61% of US adults investing in the stock market in 2023. This figure has been steadily increasing since 2020 and is close to pre-recession levels. However, stock ownership is not equally distributed, with the wealthiest 1% of Americans owning 49% of stocks.

Foreign direct investment (FDI)

The United States is the world's top destination for FDI. In 2021, the US recorded the largest increase in inward FDI of all economies, with an increase of $506 billion, or 11.3%. The US maintained its position as the top destination for FDI in 2022, with inflows of USD 285 billion, despite a 26.5% decrease year-on-year. The main investing countries in the US are Japan, Canada, Germany, and the United Kingdom, with Europe as a whole accounting for USD 2.8 trillion. Foreign direct investment in the US is centred on the manufacturing sector, representing 42.4% of the total investment. Substantial investments are also observed in finance and insurance (10.6%) and wholesale trade (9.7%).

The advantages of investing in the US through FDI include access to the largest consumer market in the world, a stable political environment, advanced infrastructure, a skilled labour force, and robust legal protections for investors. Additionally, the US has a culture of innovation and entrepreneurship, fostering opportunities for growth and development. However, there are also potential disadvantages to investing in the US, including high operational costs, complex regulatory requirements, fierce competition, and potential cultural and communication challenges when operating in a diverse and dynamic market.

The US government has implemented various initiatives to promote and regulate FDI, such as the Foreign Investment Risk Review Modernisation Act (FIRRMA), which aims to modernise and reinforce the Committee on Foreign Investment in the United States (CFIUS) to address national security concerns. The SelectUSA program, led by the US Department of Commerce, is another initiative that facilitates high-impact business investment into the country.

Workplace retirement plans

Retirement plans are an important part of financial planning, and for many US workers, their retirement income will come from employer-sponsored savings plans. These workplace retirement plans allow employees to contribute a part of their income to their retirement plan, which is then managed by the employee through the purchase of investments such as mutual funds, stocks, bonds, and ETFs.

There are several types of workplace retirement plans, including the 401(k), 403(b), and 457 plans. These plans are offered by employers, with the specific plan depending on the type of organization. For instance, if you are self-employed or a small business owner, a Simplified Employee Pension (SEP) plan or a Savings Incentive Match Plan for Employees (SIMPLE) IRA are alternative options for setting aside money for retirement.

A 401(k) plan is a defined contribution plan, which means employees can elect to defer a portion of their salary to be contributed to the plan before taxes. In some cases, employers may match these contributions. This type of plan gives employees control over their retirement income, as they can choose to contribute part of their salary and often direct their own investments.

Another type of defined contribution plan is the Employee Stock Ownership Plan (ESOP), where the primary investments are in employer stock. Additionally, there are defined benefit plans, which promise a specified monthly benefit at retirement. This benefit can be stated as an exact dollar amount or calculated using a formula that considers factors such as salary and service.

The choice between a defined contribution plan and a defined benefit plan depends on various factors, including an individual's financial situation and retirement goals. It's important to carefully consider the options available and seek independent financial advice to make informed decisions about retirement planning.

Individual brokerage accounts

An individual brokerage account is an investment account that allows you to buy and sell a variety of investments, including stocks, bonds, mutual funds, and ETFs. It is a flexible option for those looking to manage their money and make investments. With an individual brokerage account, you are free to decide how to manage your investments. You can choose to handle your investments independently or work with an advisor.

There are no fees to open and maintain an individual brokerage account, and there are no restrictions on the dollar amount you can invest. You are also free to take money out of the account at any time without paying any penalties or fees. This type of account is ideal for those saving for retirement or other financial goals, such as buying a house or paying for college tuition.

When opening an individual brokerage account, you will need to choose between a standard brokerage account and a managed brokerage account. A standard brokerage account offers maximum flexibility and access to a wide range of investments. You can easily deposit money and buy and sell investments through a brokerage. A managed brokerage account, on the other hand, comes with investment management from a human investment advisor or a robo-advisor. Robo-advisors use computer programs to choose and manage your investments based on your goals and provide a low-cost alternative to human investment management.

It is important to note that while brokerage accounts offer flexibility, they lack the tax benefits found in retirement accounts. Investment income within a brokerage account is subject to capital gains taxes, and you may have to pay taxes on dividends.

Stock market index funds

How Index Funds Work

Index funds are a type of mutual fund or exchange-traded fund (ETF) that tracks a particular market index, such as the S&P 500, Dow Jones Industrial Average, or the Nasdaq Composite Index. The fund will hold the same investments as the index it tracks, and its performance will closely mirror that of the index. For example, an S&P 500 index fund will hold the stocks of the 500 largest U.S. public companies that make up the S&P 500 index.

Index funds are considered a passive investment strategy because they don't require active management. The fund managers simply need to ensure the fund matches the performance of the underlying index, without needing to actively pick and choose investments. This passive approach helps keep costs low, as there is less buying and selling of holdings, resulting in lower transaction fees and commissions.

Benefits of Index Funds

There are several advantages to investing in stock market index funds:

• Lower fees and expenses: Index funds typically have lower expense ratios compared to actively managed funds because they require less research, trading, and management.
• Broad market exposure and diversification: Index funds offer investors a simple way to gain exposure to a broad and diversified portfolio of stocks or bonds, reducing the risk of losing money by investing in a single company.
• Historical performance: Over the long term, index funds have often outperformed actively managed funds, especially when taking into account the lower fees associated with passive investing.
• Tax efficiency: The lower turnover rates in index funds result in fewer capital gains distributions, making them more tax-efficient than actively managed funds.

Drawbacks of Index Funds

Despite their popularity, index funds do have some disadvantages:

• Lack of flexibility: Index funds are designed to mirror a specific market, so they will decline in value when the market declines, and they cannot pivot to take advantage of changing market conditions.
• Inability to beat the market: Index funds are designed to match the market's performance, so they will not provide the opportunity for investors to outperform the market.
• Limited control: Investors in index funds do not have control over the specific securities held within the fund, as these are determined by the underlying index.

How to Invest in Index Funds

Investing in index funds can be a straightforward process:

• Choose an investment platform: Select an online brokerage or investment platform that offers the index funds you want to invest in.
• Open and fund an account: Provide personal information, set up login credentials, and complete a questionnaire about your investment goals and risk tolerance. Then, deposit funds into your account, usually through a bank transfer.
• Select an index fund: Research different index funds to understand their performance history, management fees, and the indexes they track. Consider diversifying your portfolio by investing in multiple index funds.
• Buy shares: With your account funded, you can purchase shares of your chosen index fund directly through the platform's website or app.
• Monitor and adjust: While index funds are typically long-term investments, it's important to periodically review your portfolio to ensure it remains aligned with your financial goals.

Low-cost ETFs

When choosing a low-cost ETF, one of the most important factors to consider is the expense ratio, which is the measure of the cost to run the fund. The lower the expense ratio, the lower the cost of fund ownership. Here are some examples of low-cost ETFs with low expense ratios:

• Vanguard Total Stock Market ETF (VTI): Tracks the total US stock market with a 0.03% expense ratio.
• Vanguard S&P 500 ETF (VOO): Tracks the S&P 500 with a 0.03% expense ratio.
• Vanguard Mid-Cap ETF (VO): Tracks mid-range market values with a 0.04% expense ratio.
• Vanguard Value ETF (VTV): Focuses on income and value stocks with a mere 0.04% expense ratio.
• IShares Core U.S. Aggregate Bond ETF (AGG): Tracks the Bloomberg U.S. Aggregate Index with a 0.03% expense ratio.

These low-cost ETFs provide investors with a cost-effective way to gain diversified exposure to the US stock market. By minimising fees, investors can generate superior returns over time as more of their money is compounding in their investment accounts.

Frequently asked questions