People invest in things they feel comfortable with. That’s why:

 

  • Investors on the west coast are more likely to hold technology stocks
  • Investors in the northeast are more likely to hold financial (i.e. bank) stocks
  • Investors in the south more likely to hold energy (i.e. oil) stocks
  • Investors in the midwest are more likely to hold industrial stocks

    The same pattern emerges at the domestic level. US investors are more comfortable holding US-based stocks. This is called “home country bias,” and it means investors have a tendency to favor companies from their own country as compared to those from other countries.

    This is not just a US-based bias. Investors across the world do the same thing:

    The average American is ~80% exposed to the US, despite the American stock market being around half the global weight.

    The average Canadian is ~60% exposed to the Canadian stock market, despite it being only 3% of the global weight.

    If you are a US-based investor who is overly concentrated in US stocks, this approach has turned out very well over the past decade:

    But if you look back over the previous decades, it’s clear that the performance of each country ebbs and flows. Knowing that it’s impossible to predict which sector or stock market will perform the best, we diversify.

    While it might feel more comfortable to invest locally, buying international companies provides exposure to great international businesses: Toyota, Nestle, Roche, and many more. In fact, there are about twice as many stocks listed internationally as there are in the US (source #1, source #2)

    When setting up your portfolio, be mindful of home country bias, don’t concentrate too much of your investments in your domestic market, and diversify internationally.

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    The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The material has been gathered from sources believed to be reliable, however Think Different Financial Planning cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.