Key Points

  • Investors with a large home bias may not be nearly as diversified across sectors as they believe and risk missing their financial goals as longer-term trends tend to shift with the start of a new global economic cycle.

  • Consider rebalancing portfolios back toward international stocks; years of U.S. stock outperformance may have caused a drift away from longer-term asset allocation targets.

  • Fortunately, obtaining global diversification has never been easier or less expensive.

When investors talk about “the stock market” they are most often referring to an index that tracks stocks only in their home country. This “home bias” is evident when it comes to the make-up of investors’ stock portfolios. Investors around the world tend to hold mostly domestic stocks. U.S. investors, for example, tend to put 75% of their equity holdings in domestic stocks, much higher than the 55% of global market capitalization composed of U.S. stocks. Those American investors with holdings based solely in the U.S. are missing out on about half the world’s investable universe.

Home bias: Investors’ portfolios overweight their home country no matter where they live

Investors with a large home bias may not be nearly as diversified across sectors as they believe and risk missing their financial goals as longer-term trends tend to shift with the start of a new global economic cycle.

Sector surprise

No one country offers full global stock market exposure across all sectors. It may be surprising to know how closely some major countries stock markets perform like a single sector of the global stock market, illustrating the lack of diversification inherent in having a portfolio with a large home bias.

For example, despite the fact that only 12% of the value of the stocks in the MSCI World Automobiles Index are German, the German stock market closely tracked the performance of auto stocks for the past two decades.

Germany driven by autos