Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Home Bias

What it is:

Home bias is a tendency to invest in companies that reside in the investor's home country.

How it works (Example):

For example, let's say John Doe lives in Canada. About 80% of his portfolio is stocks, and of those stocks, nearly all are Canadian companies. John says he doesn't invest in companies outside of Canada because he doesn't "get" foreign companies and doesn't understand their accounting conventions.

In a philosophical sense, home bias is an extreme version of the idea of "invest in what you know." Though this is still good advice, investing only in one country can pose significant political and market risks.
 

Why it Matters:

Home bias is a response to a lack of knowledge about foreign investments and a resistance to the perceived "hassle" of trading them. The consequence of home bias, however, is that the investor is not diversified properly and can be shouldering unnecessary risk. In John Doe's case, a big shift in the Canadian stock market or unfavorable news about the Canadian government can hurt his portfolio considerably more so than if he had diversified his equity holdings to include stocks of companies outside of Canada.