investing home country bias
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Investing home country bias bds financial

Investing home country bias

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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. Home country bias can cause an investor to build an unbalanced portfolio that lacks diversification and is subject to unnecessary risk. Naturally, people take comfort in the familiar. Thus, it follows that investors select companies they know and trust.

However, investors who do not recognize this bias in themselves may end up with unbalanced portfolios and ignoring one of the cardinal tenets of investing: diversification. By not diversifying with international securities , an investor could create weaken their portfolio if their home country suffers a serious economic decline.

Or the investor could simply miss out on foreign investment opportunities. There are significant diversification benefits to a well-constructed international portfolio. As with many investing prejudices, overcoming home country bias requires thoughtful intention and determined discipline.

The first step is to recognize it, and the second step is to do something about it. However, there are benefits that come with international investing. It is a critical ingredient in wealth-generation strategies for portfolios with long-term investment horizons and can be a fruitful and enlightening adventure. Investing Essentials. Portfolio Management. Trading Psychology. ETF News. Your Money. Personal Finance.

Your Practice. Popular Courses. Trading Skills Trading Psychology. What Is Home Country Bias? Key Takeaways: Home country bias is the tendency for an investor to prefer companies from their own country or region. Such investors may overweight their exposure to domestic stocks.

For illustrative purposes only. This does not constitute a recommendation to adopt any particular asset allocation. In our view, the case could be made that US investors are simply smart, rather than biased, and they chose to weight US stocks in excess of their market cap. Certainly that exposure has worked to their advantage in recent years.

However, anecdotal evidence suggests that international investors favor their home countries too, and by under-owning US stocks these biases have worked against them. We believe that non-US equities are a key strategic investment, and current market conditions may be creating opportunities. For investors concerned with full US equity valuations, non-US equities may be compelling on both an absolute and sector-adjusted basis. In particular, we believe earnings growth in will be particularly strong as these assets are more levered to the acceleration in global growth.

In Europe, first quarter earnings delivered the largest positive surprise since the Global Financial Crisis, while the price reaction has been relatively modest. We expect a continued strong recovery in earnings outside the US in as more countries rebound from the lingering effects of COVID While familiarity and home country bias are very common, the good news is that they are easily overcome by exploring the ample investment opportunities outside of the US.

If selecting multiple new funds to cover the developed non-US large and small cap, and emerging market markets is too onerous, one can consider mutual fund options that help hit two birds with one stone. Perhaps now is a good time for investors to consider becoming more familiar with international assets.

Previously we noted how higher oil prices and fallen angels have driven dramatic spread compression across the high yield HY energy sector.

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For example, for tax-deferred investors in the US, foreign dividend tax withholdings may present a disadvantageous tax drag on international investments. In general, however, neglecting the benefits that global diversification has to offer may increase risks and decrease the investment opportunity set. As the chart below illustrates, 13 different developed countries out of 21 had the best-performing equity market in a given calendar year for the 20 years ended in December , and no country had the best-performing market for more than two consecutive years.

In US dollars. Source: MSCI developed markets country indices net dividends. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. This trend was also observable in emerging markets. As the second chart below illustrates, 13 different emerging market countries out of 20 had the best-performing market in a given year, and no country had the best-performing market in consecutive years.

Source: MSCI emerging markets country indices gross dividends. This data shows that it is difficult to know which markets will outperform from year to year. Perspective matters. I used to work in international equities, specifically covering the Asian ex-Japan markets. I also lived in Taiwan and Malaysia for elementary and middle school. My bias for these Asian companies was due to my upbringing and my work experience. I was optimistic about the growth of the Asian markets and especially Taiwanese and Chinese tech companies.

As my time away from working in finance grew, so did the decline in my exposure to Asian equities. In the unlikely event that China invades Taiwan, both Chinese and Taiwanese equities will plummet. Therefore, domestic investors in China, Taiwan, and Asia overall should probably consider reducing their home country bias. Some believe home country bias can cause an investor to build an unbalanced portfolio that lacks diversification and is subject to unnecessary risk.

The main country to invest in is The United States Of America, which has outperformed most other countries since the pandemic began. During times of war, the United States looks even more attractive because it has the most powerful military to protect its citizens. Therefore, I expect more foreigners to buy more U. I fully expect foreign investors to gobble up a lot more U.

The pandemic throttled foreign demand for U. But now the pent-up demand is too great. If you are not a U. If you are a domestic U. The outperformance of U. If you must diversify your portfolio with international securities as a U. According to World Population Review, the top 10 most democratic nations in the world as of are. The United States scored 7. But of course, I think this characterization of the U.

It turns out, most of the people who decide which countries are the happiest and most democratic come from the top 10 countries! Besides, there will likely be a growing valuation discount for European equities given the proximity of the Russian war. The fear is that Putin continues to march west and wreak havoc. The risk:reward ratio for investing in emerging markets is simply not worth it. Further, if U. In times like these, we should really appreciate the value of our U.

The less exposure an asset has to uncontrollable exogenous variables the better. I love owning a stable income-generating asset that provides an important purpose. Stocks are very volatile compared to real estate. Therefore, if you want to dampen volatility, diversify your investments, and build wealth at the same time, invest in real estate. Real estate is my favorite asset class to build wealth. The combination of rising rents and rising capital values is a very powerful wealth-builder.

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Buy This, Not That is a 1 new release and 1 best seller on Amazon. Thanks for your support! To g et my posts in your inbox as soon as they are published, sign up here. I agree that diversifying from your home country is important. However, I would argue that for those in the US, diversification is still important. Since the start of the Ukraine conflict, Canadian equities have performed better than International equities due mostly to resources. Thanks for sharing! Always interesting to see how other people asset allocate.

Resource stocks have done so well. Amazing this year! The biggest reason why I made the change in allocation in was because I thought many stocks in the US were very expensive. Comparatively, stocks outside the US looked very cheap. For a regular company, like banks or telcos, I will always prefer to invest in Canada, although I still have some diversification due to credit risk specific to Canada.

Generally, I always had a higher allocation in US stocks, simply because the US have better companies. Some countries may even require dual citizenship to invest elsewhere, which is hard to get for almost everyone in the regular population. In that regard, I was wondering how you were able to invest in Samsung? I was also interested in this company, but South Korea prohibit foreign investors to buy shares of korean companies.

Do you have a direct or indirect investment? Do you reside and work in Canada or America? I have to check, but Canadian and US equities tend to perform quite similarly over the years. I invested in individual Asian names and Asia speciality funds like Matthews International before because I know them. I am in Canada. I always invested more in the US because there are better investments to be made. Lot more choices in the US, obviously. Canadian stock market is very different. Almost no tech companies, or no profitable ones.

And outside of banks, telcos and REITs, there is almost no great large cap companies. The only advantage of the Canadian stock market is in commodities. Not only because of canadian natural resources. But I think canadian regulations are better to operate in foreign countries like Africa and South America, where there are lots of resources, but very poor capital markets. The other problem with canadian companies is they rarely aim to expand beyond Canada, because competition is much more fierce, which greatly limit the potential for long term growth.

There are some exceptions, but they are very few. Yes, I am overweight Australian stocks and Australian investments. There are three reasons for this:. This mix minimizes volatility in Australian Dollar returns. For US investors adding foreign investments usually increases volatility of returns.

There are tax advantages to investing in Australian stocks. So, also a lot of my foreign exposure is through Australian listed closed end funds. Australian stocks are reasonably valued on the whole. US stocks are expensive. Especially how expensive US stocks are. They have done fantastically for the last 10 years, but will or can that continue.

Be careful who you vote for. It can be reasoned a large percentage of the Russian people in Russia got what they wanted. They voted for Putin and his ideology. As a result, they must live with the consequences of his action. Hi Sam I am amazed with your ability to consistently dive deep and give insights into so many topics! I have always said I know a little about 3 subjects, but I am not an expert in any of them. Your not at all the same, you have so much information to share in so many subjects…Thank You!

What I would guess most investors fear is the Russia scenario…were your entire neat egg is invested in an economy that implodes. If I lived in Russia and I had a diversified investment portfolio would it really help? I think everyday how to best invest and learn to help my family succeed.

I am sure the same is true of investors in Russia today yet they are in a terrible spot. I dont know but having faith, learning, investing , and try to be humble might help. If you invest in the SnP you will get international exposure bc most us corporations are multinationals Add US RE and have a cash flow business then you are good in an inflationary or deflationary environment. But yes, multinational US companies are getting negatively affected as well. Investment into countries with no rule of law, freedom, accurate auditing of companies in my opinion is very risky.

Am I mistaken in my understanding that Chinese companies are not subject to the audit rules that all US companies must abide by? Plus again is it my understanding that Chinese citizens cannot invest outside china? Plus does China allow foreigners to buy Chinese companies?

Anything listed here are just proxy companies? As far as investment into low growth Europe also offers little. Major tech development Is fostered through freedom, democracy and capitalism and rewards investors. Why would I want to invest anywhere else? Good thought provoking post Sam! As usual. It definitely would make me leery of investing there.

Also, of course, there is the rule of law.

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Behavioural Finance for Everyday Investors: Home Country Bias

Home country bias refers to. However, anecdotal evidence suggests that international investors favor their home countries too, and by under-owning US stocks these biases. Home country bias is a global phenomenon that may happen consciously or unconsciously. While there are many good reasons for home country bias.