Home Bias Investing

Whenever I review a prospective client’s investment portfolio, I rarely see one that is truly globally diversified. The biggest problem I see is that most people are woefully over-weighted in US stocks. To make matters even worse, its usually exposure to just large US company stocks.

Their advisors might have placed them into General Motors, GE, Verizon, Proctor & Gamble, Johnson & Johnson, and similar large stocks.

The problem here is that the investor thinks he or she is properly diversified, but in reality, they have several sectors representing only two asset classes. So when one of the stocks rises, generally they all rise. But when one drops in price, more often then not they all drop. The result: unintentional wild swings in account values.

What’s missing may be International Stocks. What is surprising to many investors and many advisors is that stocks representing the international asset classes can actually reduce the overall risk inside a portfolio.

How can this be? Well, according to Forbes Magazine, 74 of the largest 100 public companies are now based outside of the United States. As a whole the US represents only about 40% of the world’s market capitalization. Investing overseas, if done properly, may be much less riskier than in years past.

We are truly a global economy. So reduce your risk by properly diversifying into the international asset classes – and don’t be a “Home-er.” Consult an advisor who understands proper global diversification.

Here’s a video featuring Professor Kenneth French from Dartmouth College talking about the risks of home bias in investing.

http://www.dimensional.com/famafrench/2011/05/home-bias.html