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. 

  1. Bias

    Biases are human tendencies that affect our behavior and perspective, ...
  2. Attribute Bias

    Attribute bias is the tendency of stocks selected by a quantitative ...
  3. Sample Selection Bias

    Sample selection bias is a type of bias caused by using non-random ...
  4. Dedicated Short Bias

    Dedicated short bias is a strategy where a hedge fund maintains ...
  5. Outcome Bias

    Outcome bias is an error made in evaluating the quality of a ...
  6. Survivorship Bias Risk

    Survivorship bias risk means an investor can make a bad decision ...
Related Articles
  1. Investing

    Behavioral Bias: Cognitive Versus 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 on investing decisions.
  2. Investing

    6 Cognitive Biases That Can Derail Your Portfolio

    Don't let these six cognitive biases result in poor decisions that can derail your portfolio.
  3. Investing

    Top Reasons Stock Indices Could Be Biased

    Do the owners of the large stock indices (McGraw Hill Financial, CME Group, and News Corp) have incentive to pick stocks to put in the index that are "shiny" as a marketing ploy? And if so, wouldn't ...
  4. Investing

    Mutual Fund Returns: Not Always What They Appear

    Survivorship bias erases substandard performers, distorting overall mutual fund returns.
  5. Investing

    Is Your Wealth Advisor an Investment Vulcan?

    Research shows that investments managed by financial advisors perform better. Why?
  6. Investing

    Is Biased Investing Holding You Back?

    Risk aversion seems to come to us naturally, preventing us from stepping into unfamiliar territory. But feeling comfortable isn't always the best thing for your portfolio.
  7. Small Business

    7 Ways Your Emotions Skew Your Business Decisions

    Important decisions such as making a key investment, increasing production or expanding into new lines are all clouded by human emotion. Can you stay cool under pressure?
  8. Investing

    Behavioral Finance and the 4 Stages of Bull and Bear Markets

    Step into the psychological aspect of investing. Just as investor behavior can be irrational during bull markets, bear market cycles may also exemplify unique cognitive biases.
  1. 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 >>
  2. What indicators are used in exchange rate forecasting?

    Learn what economic indicators are most widely used to forecast a country’s exchange rate and how various foreign exchange ... Read Answer >>
  3. What is foreign exchange?

    Foreign exchange is the conversion of a country's currency into another. In a free economy, a country's currency is valued ... Read Answer >>
Trading Center