As we manage our investments, many of us allocate our money across different classes: stocks, bonds, real estate, cash, and so on. Within stocks, many of us have different strategies. Some stick to index funds, some like individual stocks, some like a hybrid approach. We are all different.
But here’s a question for you: when you invest in stocks, do you first think of companies in your home country? For example, if you’re in the U.S., do you think of U.S.-based companies as the basis of your equity investments?
According to this interesting piece on Kiplinger.com, you may be guilty of home-country bias. This is where people tend to invest more in their home country stocks than they should based on percentages. For example, the article states that the U.S. owns 43% of the world’s stock market value, but U.S. investors hold 70% of stocks in American companies.
Interestingly, the are more glaring examples given. Japan holds about 10% of the worlds’ stock value, but Japanese investors focus 63% of their stock investments on home country companies. An even more extreme example from the past: in the 1980’s Sweden accounted for less than 1% of the world’s stock value, but Swedish investors – according to the article – were 100% invested in home country stocks.
To me, this is another example of people focusing too much on what they know, feeling safer about that than what they think they don’t know. This concept extends beyond the realm of domestic vs. international stocks, all the way to people investing in their employer’s stocks vs. other stocks because it’s the home team.
I have clearly seen this phenomenon in action, in one particular case from years ago, where I heard someone announce to a large gathering of coworkers at his retirement party, that he invested 100% in the company and that he recommends that we all do the same. I couldn’t believe my ears – not only by the words he said, but also by the ovation he received from much of the attendees.
Whether it’s your own employer, it’s industry, or your even home country – it’s smart to watch out for this familiarity bias.
As for myself, I have employed an index-based strategy for the most part, so I’m not showing a familiarity bias in terms of companies or industries that I personally know better. That said, I have to say that after looking at the figure above referencing the U.S. holding 43% of world stock value, I have to say that I too have shown a home country bias. I have been down in the 10% range, in terms of percentage of stocks that are international. To me, this has been something I thought about as a way to have some diversification, but I still thought of U.S. stocks as the obvious foundation of my stock investments.
As I think about this more, it may time for a paradigm shift for me. This might mean thinking globally first while leaning toward home country stocks out of loyalty, vs. what I have been doing, which is thinking U.S. stocks first and foremost with international stocks just as a token part of my investments.
What do you think? Do you have a home country bias with your investments?