Matthew J. Bartolini, CFA, Head of SPDR Americas Research
Studies have shown that there can be a considerable disconnect between investment allocations to one’s own country and the proportional representation of that country in a global portfolio.(1) But while favoring one’s home country may be a patriotic gesture, when it comes to investing, home-country bias can be detrimental to a portfolio.
Investors remain too close to home
Home-country bias is a common phenomenon in which investors tend to allocate a large majority of their portfolio to investments in their home country. The result? Portfolios have a concentrated country exposure, limiting potential returns as well as diversification.Studies demonstrate that home-country bias is prevalent among US investors. According to the International Monetary Fund’s (IMF’s) Coordinated Portfolio Investment Survey, US investors allocate over 70% of their equity exposure to US securities.(2) However, measuring on the basis of market capitalization of equity, the US represents just 53% of the market cap weighted MSCI ACWI Index—a broad representation of 47 investable countries.(3)
Why does home-country bias matter?
Home-country bias wouldn’t be a concern if it didn’t have a material impact on portfolio outcomes. There are several reasons why correcting home-country bias can improve a portfolio’s risk/return profile, as well as higher income generation potential.
For more, please read the rest of the post originally published on the SPDR Blog on May 13.
(1)International Monetary Fund, “Coordinated Portfolio Investment Survey,” June 2016.
(2)International Monetary Fund, “Coordinated Portfolio Investment Survey,” June 2016.
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