Home Country Bias

Home country bias is the well-documented tendency for investors to allocate a disproportionate share of their stock portfolio to companies based in their own country, well beyond what that country represents in the global market. A globally market-cap-weighted portfolio would hold each country in proportion to its share of world stock market value; a home-biased portfolio instead tilts heavily toward the domestic market. The pattern shows up in nearly every country studied, which is what makes it a recognized behavioral tendency rather than a quirk of any one market.

The bias has several ordinary causes, most of them understandable rather than irrational. Familiarity is the strongest: people feel they understand companies they know and see every day, and comfort with the familiar substitutes for analysis. Convenience and cost play a role, since domestic stocks and funds are usually cheaper and simpler to buy, with no currency conversion and no foreign tax paperwork. There can also be a rational core: home-country investing avoids currency risk on the portion held domestically, and for an investor whose spending is all in the home currency, some home tilt reduces the mismatch between where they invest and where they will spend.

The cost of an extreme home tilt is reduced diversification. A portfolio concentrated in one country rises and falls with that country's economy, market sentiment, currency, and policy, so it forgoes the smoothing effect of holding companies whose fortunes are driven by different forces. The size of the gap depends on where you live: a U.S. investor's home market is a large share of global stock market value, so a U.S. home bias is less extreme in its effect than the same behavior in a small country whose market is a tiny fraction of the world, where holding only domestic stocks means missing most of the global opportunity set. There is no single correct international allocation, and reasonable investors and fund providers land in a wide range; the point of naming the bias is to make the tilt a deliberate choice rather than an unexamined default. An investor should decide how much international exposure to hold on purpose, weighing diversification against currency risk and cost, rather than defaulting to all-domestic simply because it feels safer.

In practice, home country bias is measured by comparing the domestic share of an investor's stock holdings to the domestic market's share of global stock market value. The larger the gap, the stronger the bias.

A hypothetical. Suppose global stock market value is split so that an investor's home country makes up 60% of it and the rest of the world makes up 40%. A globally market-cap-weighted stock portfolio would hold 60% home and 40% international. An investor who instead holds 95% domestic stocks and 5% international is exhibiting home country bias: they are overweight their home market by 35 percentage points relative to its global share, and correspondingly underweight everywhere else. Whether that tilt helps or hurts in any given period is unknowable in advance; what is certain is that the portfolio's fate is tied much more tightly to one country than the global market would dictate.

The case for some home tilt

• Domestic holdings avoid currency risk for an investor who spends in the home currency.
• Home-country funds are often cheaper and simpler, with no foreign tax complications.
• For an investor in a country that is a large share of the global market, a moderate home tilt sacrifices less diversification.

The case against overdoing it

• Heavy concentration in one country forgoes the diversification benefit of global investing and ties results to a single economy and market.
• It is usually a default driven by familiarity, not a considered decision.
• In a small home market, an all-domestic portfolio misses most of the world's companies.