Home Bias

What is 'Home Bias'

Home bias is the tendency for investors to invest in a large amount of domestic equities, despite the purported benefits of diversifying into foreign equities. This bias is believed to have arisen as a result of the extra difficulties associated with investing in foreign equities, such as legal restrictions and additional transaction costs.

BREAKING DOWN 'Home Bias'

Investing in foreign equities tends to lower the amount of systematic risk in a portfolio because foreign investments are less likely to be affected by domestic market changes.

However, investors from all over the world tend to be biased toward investing in domestic equities. For example, an academic study from the late 1980s showed that although Sweden possessed a capitalization that only represented about 1% of the world's market value of equities, Swedish investors put their money almost exclusively into domestic investments.

RELATED TERMS
  1. Foreign Investment

    Flows of capital from one nation to another in exchange for significant ...
  2. Home Country Bias

    Investors' natural tendency to be most attracted to investments ...
  3. Foreign Earned Income Exclusion

    The amount of income earned from a foreign source that is excludable ...
  4. Foreign Currency Effects

    The gain or loss on foreign investments due to changes in the ...
  5. Blue Chip Swap

    When a domestic investor purchases a foreign asset and then transfers ...
  6. Foreign Direct Investment - FDI

    A foreign direct Investment (or FDI) is an investment made by ...
Related Articles
  1. Markets

    Cautionary Signs For International Investors

    "Going global" is a fashionable investing style, but investors should know the risks.
  2. Investing

    8 Common Biases That Impact Investment Decisions

    Behavioral biases hit us all as investors and can vary depending upon our investor personality type.
  3. ETFs & Mutual Funds

    Protect Your Foreign Investments From Currency Risk

    Hedging against currency risk can add a level of safety to your offshore investments.
  4. Investing

    Explaining Interest Rate Parity

    Interest rate parity exists when the expected nominal rates are the same for both domestic and foreign assets.
  5. Managing Wealth

    Behavioral Bias - Cognitive Vs. Emotional Bias In Investing

    We all have biases. The key to better investing is to identify those biases and create rules to minimize their effect.
  6. Managing Wealth

    Broadening Your Portfolio's Borders

    Find out what type of international fund might suit your needs in gaining exposure to foreign markets.
  7. Personal Finance

    Investing Beyond Your Borders

    Investing abroad poses risks, but can also help you diversify. Discover ways to invest in foreign stocks.
  8. Investing

    Should My Portfolio Include Private Equity?

    Private equity offers a lot of potential, but is it worth the risk?
  9. ETFs & Mutual Funds

    Getting Into International Investing

    Diversifying can mean not only investing in various asset classes but also venturing beyond domestic exchanges.
  10. ETFs & Mutual Funds

    Go International With Foreign Index Funds

    As global trade continues to expand and the world's economies grow, spice up your portfolio with these exciting opportunities.
RELATED FAQS
  1. What are some examples of a Foreign Institutional Investor (FII)?

    Discover some examples of foreign institutional investors, and learn information about the nature of foreign institutional ... Read Answer >>
  2. I live in the U.S. How can I trade stocks in China and India?

    Foreign markets have always been an object of envy to domestic investors because the indexes in some foreign countries have ... Read Answer >>
  3. What are the advantages of foreign portfolio investment?

    Learn the advantages that businesses can derive from foreign portfolio investment in an increasingly globalized business ... Read Answer >>
  4. What are the differences between debt and equity markets?

    Understand the basic, fundamental differences between the two primary investment markets of debt securities and equity investments. Read Answer >>
  5. How does the risk profile of private equity investments compare to those of other ...

    Learn how the risk profile of private equity investment compares to other asset classes and the aspects investors should ... Read Answer >>
  6. Why are private equity investments usually reserved for rich people?

    Learn what investors without a high net worth can do to invest in private equity investments, and discover the benefits and ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center