Home Country Bias; A Sure Way To Miss Out On Higher Expected Returns
Home country bias is the tendency to overweight our investments to our home country, such as 60 percent to U.S. stock funds and 40 percent to international stock funds. Home country bias is a common problem in many investors allocations and leads to lower-expected returns than if the weights fell along natural market weights. The natural market weight as of June 2013 is 50 percent U.S. stocks (about $18 trillion dollars in market capitalization) and 50 percent international stocks. Home country bias is also a form of speculation, that the U.S. will outperform the rest of the world, and for long-term investors conflicts with the basic tenets of long-term investing versus speculating.
American's are not alone in the tendency to bias the home country. Investors abroad also bias their portfolios towards stocks of their home country: Canadian investors hold more Canadian stock funds than stock funds from the rest of the world; Japanese investors hold more Japanese stock funds than stock funs from the rest of the world. The tendency to bias one's home country may follow nationalist sentiments. It may also be linked to the desire to hold investments that track with the daily news such as reporting of how the Dow Jones Industrial Average or Standard and Poors 500 performed. It is not as much fun to have a portfolio that went down over the last year when the U.S. indices went up. But rational investors know that what matters more is the cumulative returns, not monthly or annual comparisons.
At Rogowski Wealth Management we design portfolios that can help take the emotional attachment out of investing so as to insure we are investing, not speculating. To learn more about how we can help, talk with Bryan.