March 26, 2015
What is home country bias (investing term) and what can you do about combatting it?
What is home country bias (investing term) and what can you do about combatting it?
Home country bias means being more optimistic about or more likely to invest in companies that are domestic rather than foreign. This leads people to not diversifying their portfolio with foreign investments as well as investments within their own country. Combat this by taking emotion out of your investing and do your research. You can become just as comfortable and familiar with foreign investments if you educate yourself on the topic.
Home country bias is when you only buy stock of your home county. This is especially prevalent in America. You want to own stock in more than one county to be well diversified. If a country has an economic downturn all your stock in that country would be hit. If you own stock in many countries then you are diversified away from that issue. A total international fund or an emerging markets fund can give you a good exposure to the world and help balance your portfolio and even get a better average return in the long run. You want to hold many different stocks and foreign stocks are a good place to start looking for diversification once you have your portfolio started.
Home country bias is when you expect your home countries market to perform better than other markets. If you do that you will invest more heavily (or perhaps only) in your own countries market. This can be dangerous as all markets go in cycles. To combat this you can educate yourself and invest in international markets (preferably via index funds). This will diversify your portfolio and make your overall portfolio more stable.
Everyone did a great job with their answers. I have nothing to add.