What is Home Country Bias
Home country bias refers to the tendency for investors to favor companies from their own countries over those from other countries or regions. This tendency to invest in our own backyard is not unusual or surprising; it is a worldwide phenomenon, and certainly not unique to United States investors. This bias is also understandable. After all, we are inclined to recognize and value domestic brands, and consequently, to trust in their solidity and ability to perform well on our behalf.
Investors who exhibit home country bias with their investments tend to be optimistic about their domestic markets, and are either pessimistic or indifferent toward foreign markets. In fact, some investors likely would continue to invest in a favorite home-country company even if a similar foreign company had demonstrated better upside potential!
Breaking Down Home Country Bias
Home country bias occurs when people invest a large percentage (or most) of their portfolios in companies from their home countries. If you look at the average person's asset allocation, you will see that investors (of all sizes) have a very strong propensity to overweight their exposure to domestic stocks. The United States, for example, comprises less than 50 percent of the total world market capitalization—hence opportunity—yet the average U.S. investor still allocates more than 70 percent of his portfolio to U.S. equities.
The affinity toward this bias is one reason that building a powerful brand in today's interdependent global market is so important. Coca-Cola, Google, and Toyota, for example, all are well-known international brands and most people, no matter where they live, are inclined to buy their stocks.
Are We Hurting Ourselves With Continued Home Country Bias?
Naturally, people take comfort in the familiar. We like being comfortable, so it follows that we would invest in companies that we know and trust. But, by not recognizing this bias in ourselves, we may end up with unbalanced portfolios, thus ignoring one of the cardinal tenets of investing: diversification. By not diversifying with international securities, we unwittingly could create an actual weakness in our portfolios if our home country suffers serious economic decline; or, we simply could miss out on opportunities offered by foreign investments. So, for the most part there can be meaningful diversification benefits in a well-constructed international portfolio.
Overcoming Home Country Bias
As with many investing prejudices, overcoming home country bias requires thoughtful intention and determined discipline. The first step is to recognize it, and then plan to do something about it. This is especially difficult when one’s home market happens to be the largest equity market in the world, and when the most recent past has been singularly rewarding for those who have favored it. However, there are benefits that come with international investing. It is an important ingredient in wealth-generation strategies for portfolios with long-term investment horizons. Besides, it can be a fruitful and enlightening adventure well worth embarking upon.