Home-country bias is a reality for investors globally.
The industry perceives the natural tendency to be most attracted to investments in domestic markets as "irrational," with the potential to cost clients significantly.
The danger of home-country bias applies to U.S. investors and investors abroad, but the extent of the danger varies. For advisors of U.S. clients, the challenge is to help them resist the urge to have an extreme overweighting domestically, especially as international markets gain steam.
Compared to smaller markets, U.S. investors allocating money domestically have a greater ability to diversify because of the vast opportunties in the U.S. market. In a smaller market, like Australia, the danger of extreme home-country bias is high considering the correlation between investments. If resources, a sector that weighs heavily on the Australian market, suffer, a client's entire portfolio is dragged down.
“If you are so culturally U.S. centric, investing only in the U.S. is a mistake, but not nearly as big as a mistake as a French fund manager who only invests in French stocks,” says David Kuenzi, of Thun Financial Advisors. That’s because France accounts for only 3% of the global stock market capitalization.
At the same time, as markets become more and more intertwined and as emerging markets continue their to grow, U.S. investors would be wise to profit from it. Case in point: “When it comes to economic size, China will be, in 10 or 12 years, bigger than the U.S. and so therefore will be the largest economy in the world,” Anil K. Gupta, chair of the University of Maryland Robert H. Smith School of Business, said at the IMCA annual conference in Seattle in May. “And then emerging economies in total will actually be bigger than the developed economies. “
For all clients, whether they're based in the U.S. or expatriates residing in other countries, advisors stress that education of markets outside investors' home-countries, and the diversification benefits that come with it, helps investors feel secure about allotting their money elsewhere.
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