All of us are patriots to some degree. However, it's good to beware of home country bias to protect ourselves from unexpected risk. Home country bias refers to investors' tendency to favor companies from their own country over those from other countries or regions.
After all, it's usually better to invest in what we know rather than invest in what we don't. The more insights we have into an industry or company, the more we feel comfortable investing. Sometimes, with our superior knowledge, we might even outperform.
Home country bias investing is a worldwide phenomenon. No matter where you are from, the chances are high that you will overweight investing in the country where you currently reside. Consequently, a lot of your investment performance might actually result largely from luck.
Home Country Bias Investing By Country
Take a look at the domestic equity allocation of total equity of residency by select countries.
At one extreme, we have Bangladesh, which has an almost 100% domestic equity allocation. The Bangladeshi people either must be extremely patriotic, know something we don't about the growth of their economy, or don't have as much access to other global equity markets. The Dhaka Stock Exchange has a total market capitalization of about $72 billion.
At the other extreme, we have Austria, which has only about a 23% domestic equity allocation. The Vienna Stock Exchange has a total market capitalization of about $150 billion, which is only about six percent the size of Apple Inc's market capitalization. Perhaps Austrians are less bullish about their economy and more enthusiastic about international equities.
Home Country Bias In America
The United States, in yellow, has a 75% domestic equity allocation of total equity. Our home country bias is strong given U.S. companies only make up ~50% of the total world market capitalization. Our home country bias is not surprising given the strength of our economy, currency, and stability of our government.
Since I first started investing in 1995, it has been commonly suggested to diversify our domestic equity exposure with international equities by around 25%. Many have logically recommended investing in emerging markets for greater growth.
Too Much Home Country Bias Can Be A Big Problem
For whatever reason, the home country bias for Russians is extremely high. Roughly 96% of a Russian's domestic equity allocation of total equity is in Russian equities. When Putin decided to invade Ukraine on February 24, Russian stocks collapsed and the ruble depreciated by over 50%.
The Russia stock market ETF, RSX, was down a whopping 70%+ a week after the war started. Further, many Russian banks and energy stocks are down even further. The Russian stock market is now closed and many of the Russian ADRs, GDRs, and ETFs are at risk of being delisted.
RSX was 50%+ below where it was during the 2008-2009 global financial crisis. But it could still go down another 90% once trading resumes given its Net Asset Value is down a similar amount.
Russian stocks will likely be dead money for a very long time. Sure, there will likely be some big bounces. But investing in Russian equities for long-term growth will be difficult.
The faith in Russian equities by homeland-based Russians has led to their economic devastation. There will be a great depression like no other as companies go bankrupt and lay off millions of people. The combination of losing all your money in the stock market plus losing your job might become unbearable for some.
Diversify Your Investments Away From Poorly-Run Countries
Therefore, as an investor, we must be aware of our home country bias. It is more prudent to have a lower home country bias if your country is run by a dictator. Conversely, it is safer to have a higher home country bias if your country has a strong democracy.
Below is a chart of the Russia ETF, RSX. ~20 years of economic progress has been lost in just one week. At the moment, if you are based in Russia, there is no point working to invest. There is also no point doing business in Russia. If martial law is declared, the future for local Russians will look like North Korea.
Understanding Home Country Bias Is To Understand Human Nature
We will always be biased towards things we know versus things we don't know. Inherent bias is why people will tend to take care of people who look more like themselves or come from similar backgrounds. If we want to give historically marginalized people a better chance at competing, manual changes in the system may be needed.
Left to their own devices, the majority of those who are privileged will continue to take care of their own.
Pretend you are a rich parent who went to an elite private university. Do you really think you will willingly give up your daughter's admissions spot so that an underprivileged applicant who doesn't have your resources be admitted? Probably not.
To make yourself feel better, you might donate money to provide scholarships for underprivileged families. You might even tell the world how you're all for equity and inclusion (virtue signaling). However, whether you are willing to actually sacrifice your opportunity or a loved one's opportunity may be a different matter.
Why do wealthy politicians vociferously support public schools and send their children to private schools? Why are some adamantly for raising taxes but aren't willing to pay more themselves? Further, why are their millionaire early retirees willing to accept healthcare subsidies? It's more important to observe what people do rather than what they say.
Example Of Not Being Able To Give Up Your Spot
Back on July 13, 2020, Rachel Nichols, an ESPN host at the time who is white, discussed her career on a phone call with Adam Mendelsohn, the longtime adviser of the Los Angeles Lakers' LeBron James and James’s agent, Rich Paul. Somehow, their conversation leaked. Here's what she said.
“I wish Maria Taylor (a Black ESPN host) all the success in the world – she covers football, she covers basketball. If you need to give her more things to do because you are feeling pressure about your crappy longtime record on diversity – which, by the way, I know personally from the female side of it – like, go for it. Just find it somewhere else. You are not going to find it from me or by taking my thing away.”
Rachel voiced her opinion and wanted to protect her job after working so hard and for so long to get it. Difficult to blame her. It's only natural to want to protect what you have worked so hard to obtain. Most people would think and act the same way, which is why change is slow.
Pulling Up The Ladder From Behind You
For those who are entrenched in power or who got a head start, it is only natural for these people to take care of their friends and family. Therefore, if you are outside the circle of power, you must work harder and strategize better to get ahead.
One of the main reasons why I built a rental property portfolio is to take care of my children in case they cannot launch. Worst case, they can live in one of the rental properties while they figure out their lives. Best case, they are fine on their own and end up managing the properties for passive income.
No matter who you are, you will face challenges. The elites might not want to help you get ahead. A war on merit is brewing. Do what you can to plan ahead.
Optimism Reigns Supreme
Investors who exhibit home country bias with their investments tend to be more optimistic about their domestic markets and indifferent or more pessimistic toward foreign markets. In other words, we tend to believe we are smarter, better looking, harder working, and more productive than we actually are!
This is the Dunning-Kruger Effect in action.
Unless you've lived in multiple countries, it's hard to get a true sense of how your country's culture stacks up against another country's culture. The reason why some first-generation immigrants excel is because they appreciate how good they have it in their new country. Perspective matters.
My Investing Bias For Asian Equities
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. As a result, at one point, I had roughly 20% of my portfolio in Asian country ETFs and individual stocks such as Taiwan Semiconductor, Baidu, Tencent, Alibaba, and Samsung Electronics.
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. It is a common strategy to try and invest in the “Google of X country,” or the “Uber of Y country” to try and capitalize.
As my time away from working in finance grew, so did the decline in my exposure to Asian equities.
With Russia's invasion of Ukraine, my proclivity to invest in emerging markets has waned even further. 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.
More Capital Should Flow To The United States
As an investor who takes risk, it’s always good to have an investment thesis. It is your guiding light for capital allocation and holding duration.
Some believe home country bias can cause an investor to build an unbalanced portfolio that lacks diversification and is subject to unnecessary risk. However, I argue it's more important to invest in countries with the strongest economies, the best infrastructure, and the most stable governments, regardless of home country bias.
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.S. assets in the coming years. I fully expect foreign investors to gobble up a lot more U.S. property as the pandemic eases. The pandemic throttled foreign demand for U.S. property for two years. But now the pent-up demand is too great.
If you are not a U.S.-based investor, then I think would be wise to reduce your home country bias and invest more in U.S. equities. If you are a domestic U.S. investor, then I think it's smart to increase your home country bias above 75% for the foreseeable future.
The outperformance of U.S. equities and the U.S. economy is undisputed. But of course, I'm biased for the U.S. since I've lived here since 1991!
If You Still Want To Buy International Equities
If you must diversify your portfolio with international securities as a U.S. investor, maybe diversify into the most democratic nations. According to World Population Review, the top 10 most democratic nations in the world as of 2020 are.
- Norway (9.87)
- Iceland (9.58)
- Sweden (9.39)
- New Zealand (9.26)
- Finland (9.25)
- Ireland (9.24)
- Canada (9.22)
- Denmark (9.22)
- Australia (9.09)
- Switzerland (9.03)
The United States scored 7.92 in 2020 and again landed in the “flawed democracy” category, where it has resided since falling from “full democracy” in 2016. But of course, I think this characterization of the U.S. democracy to be flawed!
But as we learned from a previous article, there's a lot of bias for these happiest countries based on who is deciding. 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.
Keeping My Home Country Bias In U.S. Assets
I'm keeping my home country bias high at over 95% of my investments in U.S. assets. The risk:reward ratio for investing in emerging markets is simply not worth it. Further, if U.S. investments are in trouble, emerging market investments will likely experience even more downside.
In times like these, we should really appreciate the value of our U.S. real estate holdings. 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.
Diversify Your Investments Into Real Estate
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. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.
My favorite real estate investing platform is Fundrise. With over $3.5 billion in assets under management and over 400,000 investors, Fundrise is the leading, vertically integrated real estate platform today. Investors can invest in their diversified real estate funds with as little as $10.
Fundrise primarily focuses on single-family, multi-family, and build-to-rent properties in the Sunbelt. With lower valuations, higher yields, and strong demographic shifts, Fundrise investments are in the sweet spot of a positive long-term trend. Come check out what they have to offer.
Invest In Private Growth Companies
Investing in private companies is where you might be able to find the next Google, Meta, Figma, Apple and more. Personally, I allocate about 10% of my capital to venture capital.
The most interesting fund I'm allocating new capital toward is the Innovation Fund. The Innovation fund invests in:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. I don't want my kids asking me in 20 years why I didn't invest in AI or work in AI today.
The fund's investment minimum is also only $10, as Fundrise. Most venture capital funds have a $200,000+ minimum.
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Sam,
I agree that diversifying from your home country is important. However, I would argue that for those in the US, diversification is still important. Research has shown that a 20-30% exposure to international markets decreases volatility without impacting returns, plus it has the benefit of adding a further degree of diversification if anything truly catastrophic occurred stateside. Therefore, I wouldn’t advocate for anything above an 80% exposure to the US market.
As usual, a great read. Thank you!
To answer the question at the bottom of your post, I am Canadian and thru 3 ETF’s, I have the following:
– 25% Bonds (consisting of Canadian, Provincial and Corporate bonds);
– 25% Canadian Equities;
– 50% International Equities, Ex Canada (62% of which are US equities)
Since the start of the Ukraine conflict, Canadian equities have performed better than International equities due mostly to resources.
I have been invested in this manner for about 8 years and it has worked out well for me.
Thanks for sharing! Always interesting to see how other people asset allocate. Resource stocks have done so well. Amazing this year!
I’m glad your asset allocation is working well for you. That’s what matters at the end of the day!
Anybody got a good international ETF or index fund?
Hi Sam,
I am now at 51% allocation to Canada, 36% US, 9% Europe, 3% Japan and 1% China.
This is a big change from 2020, where my allocation was 58% US, 28% Canada, 10% Europe, 3% Japan and 1% China.
The biggest reason why I made the change in allocation in 2021 was because I thought many stocks in the US were very expensive. Comparatively, stocks outside the US looked very cheap.
The two other reasons why I am overinvested in Canada is because of :
– tax benefits (there is less taxes on canadian investment income compared to foreign investment income)
– avoid foreign currency exchange (there is a very high cost for converting from one currency to another, so I only invest in foreign companies when I can’t find a better opportunity in Canada, like Apple, Google, Tesla or Pepsi. 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. I’m not confortable with my allocation right now and I will probably go back to 50%+ allocated to US. I’m just waiting for better opportunities in the stock market.
Regarding investors in Bangladesh or Russia, I think it’s due to regulation prohibiting them to invest abroad. 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? 51% is pretty big if you are American. 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. So again, it’s investing in what and who you know.
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, commodities are doing great. What a ride these past few weeks!
But yes, it seems it’s hard for Canadian companies to grow beyond Canada.
Time for all of us to buckle down!
Yes, I am overweight Australian stocks and Australian investments. There are three reasons for this:
1. To eventually maximize buying power in Australian Dollars I have a 50/50 exposure to the Australian Dollar vs. other currencies. This mix minimizes volatility in Australian Dollar returns. (For US investors adding foreign investments usually increases volatility of returns.)
2. There are tax advantages to investing in Australian stocks. So, also a lot of my foreign exposure is through Australian listed closed end funds.
3. Australian stocks are reasonably valued on the whole. US stocks are expensive. European stocks are cheap but don’t seem to go anywhere and now look risky. Cheap Asian stocks also haven’t really done anything… I have exposure to all of them, but none seem that attractive.
I’d be wary of having 95% exposure to US assets if I lived in the US though. Especially how expensive US stocks are. They have done fantastically for the last 10 years, but will or can that continue.
Sounds good to me, especially with the strength in commodities.
The ASX 200 is only up 24% in the past five years. Would you suggest we rotate into an Australian stock index ETF like EWA?
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.
It is a sad situation. For the rest of the world, citizens need to take note.
Be careful who you vote for.
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!
Regarding investments outside the USA…I think most large US companies already have income/footprints in other large/developing countries. Therefore investing in Dow/S&P500/Nasdaq will already offer vast diversification.
What I would guess most investors fear is the Russia scenario…were your entire neat egg is invested in an economy that implodes. The super rich don’t have to worry. 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.
Humility is key when it comes to investing.
Investors need to practice saying the word “maybe.” When you start thinking you are 100% correct, you sometimes get blindsided.
Just got to stay vigilant!
What are the three subject matters you know little about?
I’m always learning, as there are an endless a number of things to learn. Just when you think you’ve seen it all, something new always happens.
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
Yes, but investing in the S&P 500 index is not the same as investing in international stocks.
But yes, multinational US companies are getting negatively affected as well. We all are, it’s just by different degrees.
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
I’d love to invest on foreign exchanges but they don’t allow foreigners, so I’m going to invest thru a Swiss firm that caters to Americans but exposes them to non usa investments.
Why though?
You can just buy ADRs if you’re based on the U.S.
I’m still new at this, but I’d venture a guess that the US doesn’t allow trading in stocks from some countries?
Hi Sam, that’s a salient point about Europe. Whether they can be invaded or not, putting money in places where it could end up downwind of a burning nuclear power plant isn’t my first preference.
Then too, I’ve lived in a lot of less-developed countries, and my experience was that even the practices of many of their top local businesses would not have met standards in the US. It definitely would make me leery of investing there.
Also, of course, there is the rule of law. In at least one country I lived in, any time a foreigner was involved in a traffic accident, they were automatically at fault and expected to pay for all of it because everyone knew foreigners were rich. That gives me the opposite of a warm fuzzy about investing there.
Likewise, China and Russia have proven themselves to be essentially uninvestable as their leadership has proven willing to torpedo anything and everything regardless of fiduciary interests and realities. A lot of smaller countries are in the same boat.
And then there is the corruption. The less rule of law you have, the more corruption you get in its place.
So yes, as I’ve said before, being able to invest in the US is a privilege an enormous opportunity. Especially as (if we avoid crypto) it lets us invest in things we are more familiar with and that we can understand and be informed about, and that these things will be the least likely to suddenly confront us with social, cultural, or legal misunderstandings that may jeopardize our investments.
There is a price for everything. Unfortunately for emerging markets and some European countries, that price is going up as their valuations go down further.
The USD has strengthened a lot against the Euro and other currencies. I suspect the USD will continue to outperform for a while.
I have an enormous home country bias and am doubling down on US stocks. I never really got into an emerging markets ETF, just a very small international allocation to check a box. Otherwise my future is tied to the US of A… very patriotic!
I have been wanting to take some fun money and purchase RSX but the markets are not even accepting orders to open a position. I guess it will take awhile before it become tradeable again.
The fall in Russian market is devastating but investors need to realize the NASDAQ had the same percentage fall from 2000 to 2002. I suspect many investors lost even more than the 70 percent if they attempted to buy any shares during this time when there were dead cat bounces. I had invested my IRA in a tech mutual fund in 2000. It took over 15 years for it to recover; it was not much money and I have not sold the shares as it forces me to remember just how bad can get. Those approaching retirement in 2000 with their life savings in the market were often forced to keep working as they watched their 401k balances evaporate.
When RSX finally trades, it might drop to $1 or lower. Be careful!
Sure, speculate with fun money. But not serious money you need.
If RSX doesn’t get delisted and the war ends soon after it drops to $1, the trade will be highly profitable.
Oh wow, fascinating data points! What a huge difference between Bangladesh and Austria. I used to have around 20% of my portfolio in international ETFs, but my exposure has shrunk a lot over the years.
I can’t imagine losing 70% in a week like many Russians have. That would absolutely crush me mentally and financially. It’s hard to even comprehend that much loss and let alone find a way to spark hope for a recovery.
Really great insights Sam, thank you!
I diversify internationally but draw the line at historically and inevitably future hostile countries like Russia and China.
Not only is the risk off loss great, helping them economically translates into funding their military, which will come back to bite us.
Yes, the risk is not there. Maybe you get several percentage points of outperformance. But is it worth it if you lose massive one year? No.
All the money is going to be sucked out of Russia. It is so sad.