Home Country Bias is Hurting Your Asset Allocation

According to American Funds, by the end of 2016, United States equities had outperformed international equities for 85 months based on rolling 3-year returns. This remarkable stretch for U.S. stocks has further cemented the widely-held belief that most U.S. investors have, which is that investing internationally is far too risky, and the returns stink anyways! Many do not see the purpose in investing in international companies, and rather invest in the familiar companies that allow the U.S. economy to thrive.

The inclination to invest primarily, or exclusively, in the country you live in is known as home country bias, and it’s likely hurting your ability to construct a truly diversified portfolio. In our view, investing in one single country is the equivalent to investing in one industry or sector, or one form of fixed income. At first, most would disagree with this view, and use the 85 months of U.S. outperformance as evidence to support their claim. This form of “Recency bias” can easily be refuted by stretching out the period in which we view U.S. equity vs. International equity performance, shown below.

*This simple yet telling chart shows that regional market outperformance can be cyclical when examined through multiple market cycles. Data based on Factset Research (12/31/2014)

Amazingly enough, home country bias exists across the world regardless of how small the country’s contribution to the global economy. Let’s use Australia, a much smaller developed nation, as an example. Per a recent International Monetary Fund survey, the average Australian’s investment portfolio consisted of 74% Australian equities in 2010, despite Australia only representing 3% of the world market. This outrageous disconnect represents a 70% overweight to domestic equities. In the United States, you could likely count on one hand the number of people that would have this allocation.

For U.S. investors, the notion of international investing is considered risky. It’s true that many economies, especially emerging markets, have historically shown higher levels of volatility. However, this fact holds true only when viewed on a standalone basis. In fact, the investment across all economies in a more direct relation to their contribution to the global economy actually reduces annualized change in portfolio volatility, per a recent Vanguard study.

Hopefully you can use this information as a way to recognize potential biases in your portfolio. Given the run for U.S. equities against international equities, it’s our view that now is the time to consider increased investment across global economies.  More importantly, long-term investors should not neglect international investments for fear of adding risk to your portfolio, as your actions may be adding to the very problem you’re trying to minimize!

 

 

*Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Asset allocation does not ensure a profit or protect against a loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

International Monetary Fund (IMF) is an international organization created for the purpose of promoting global monetary and exchange stability, facilitating the expansion and balanced growth of international trade, and assisting in the establishment of a multilateral system of payments for current transactions.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

**Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and Carr Financial Group are separate entities from LPL Financial.

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