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Location is a big driver of investment performance
If you’ve ever looked for a place to rent or buy, you’ve probably heard the real-estate mantra, “Location, location, location.” In a nutshell, the phrase means that location is often the single biggest driver of a home’s value.
Location plays a similar role when it comes to investing, and it has the potential to affect both current price and performance potential. In fact, where you invest is almost as important as what you invest in.
Not only can you choose among various stocks, bonds, and other asset classes, but, within those asset classes, you can also find options within different regions and countries. And each area has its own unique performance and risk characteristics.
Domestic markets are an investor’s comfort zone
Most people start by investing in their domestic markets (your domestic markets are simply the ones in your home country). Notice we say “start” investing. Your domestic market can be your foundation, but it’s important not to get stuck in your domestic comfort zone.
Investors sometimes fall victim to what is called home bias, which means they prefer investing only in their home markets because they’re most familiar with their own economy, politics, geography, and currency. They may fear political, economic, or currency volatility abroad, or they may simply fear the unknown. While some of these can be valid concerns worth considering when investing abroad, they are no reason to miss out entirely on the many attractive investment opportunities to be found beyond US markets.
Today in Lionomics, we’ll focus on the US markets, and then we’ll cover the diversification and other benefits of also investing internationally in our next post. So when you read Lionomics this week, it’ll be just like taking a trip around the world. ?
Building your investment foundation in the US market
For US-based investors like you, your domestic market consists of stocks listed on the New York Stock Exchange (NYSE), the NASDAQ, and other US exchanges. An exchange is a marketplace where securities (e.g., stocks), commodities (e.g., gold), and other investment types are traded. The NYSE and NASDAQ are the most prominent exchanges in the US.
US stocks, regardless of whether they’re listed and exchanged on the NYSE or NASDAQ, are often included in US indexes and benchmarks. In general, an index uses a subset of all the securities in a market (such as the stock market) to gauge the price/value changes of the overall market. For instance, the popular S&P 500 Index tracks the stocks of the 500 largest publicly owned US companies, and the Dow Jones Industrial Average (DJIA, or The Dow) tracks the stocks of 30 large, publicly owned US companies. There are also other indexes that track various sectors, styles, size, and other investment characteristics.
You might recognize the concept of indexes from our Lionomics post on exchange-traded funds (ETFs), which typically track an index to try and replicate its performance for investors.
In addition to stocks, your domestic market also consists of bonds, commodities, and other asset classes. US-based bonds might include corporate bonds, from high-quality investment grade bonds to speculative high yield issues, or government bonds, including US Treasuries. There are many indexes that track these bonds, such as the Bloomberg Barclays Indexes.
Opportunities abound beyond US borders
Luckily for you, as a US-based investor, there is a vibrant domestic market across asset classes that you can use to construct an attractive portfolio. However, focusing only on your domestic market may limit your investment performance potential, as there are many attractive opportunities in developed and emerging markets beyond our shores. Stay tuned for more on international markets.