What is a ‘home country bias’ and which countries are the biggest culprits? Why?
It’s human nature to fear the unfamiliar and stick to what we know. It’s probably an evolutionary reflex, and sometimes, it literally saves our lives. Other times, it can lead to harmful, potentially toxic behaviour by way of ‘othering’. In investment, it leads to ‘home country bias’, when investors primarily buy stocks and shares from their country of origin.
It’s not a very wise investment move. Academic and financial research all confirms that diversifying your portfolio into foreign markets offers better returns, but investors are quite attached to their ground. Below are some of the statistics by country, according to a 2014 study by IMF (International Monetary Fund.)
- The US accounts for 50.9% of global trade and 79% of their holdings are domestic.
- The UK covers 7.9% of global stock trade, and 26.3% of their investors keep it local.
- Australians are 2.6% of global share trading, and 66.5% of that stays within Australia.
- Canada trades 3.4% of the global share, and 59% of that never leaves their borders.
- Japanese investors are 7.2% of the global total, and 55% remains inside Japan.
As we can see, even the most financially literate nations have a tendency towards home country bias. These are all markets that have a vibrant stock trade, but they seem largely reluctant to delve into overseas share trading. Let’s explore some of the reasons why they are averse to investments that are likely to be beneficial to them.
Sticking with what they know
Investors who live overseas may have a different approach, but many locally based investors would prefer to keep their money within their borders. It’s a bit like keeping money beneath your mattress instead of taking it to the bank. You know it would be safer in the bank and would earn you interest, but you just feel more secure knowing your money is within reach. You might also feel that you have a better grasp of domestic ‘under the mattress’ risks – for example rats, house fires, and nosy spouses, as opposed to taxes and bank robbery.
Getting easy answers to questions
Even in this age of chat bots, websites, and social media, most customers prefer to talk to an actual person. Even though customer care services have automated help options from 1 to 9, customers are still more likely to ‘Press 0 to talk to a customer care representative.’ In the same way, overseas investing would require Googling and talking to machines. When you invest locally, you can take a drive or ride a bus to the office of your target brand and ask whatever you want. That personal contact appeals to investors.
Receiving in-house stock options
For many people, they first learned how to trade overseas shares by receiving stock options from their employer. These companies are often multinational organisations with an office in their home country. As these employees dabbled in stock trading, they got the illusion of offshore trade, because they had access to their company’s securities in other countries. However, they’re still using a home-based exchange, so their risk is still locally situated. In addition, Australians receive a tax cut for local stock investment, strengthening their bias.
Even for people that claim to have no political affiliations, they have a better understanding of the local scene than anything they see on CNN. They feel that they at least have a grasp of what’s happening in their capital, and they think they can foresee any challenges in real-time. Conversely, global politics has to be sifted through news station policies and analysts with potentially incomprehensible accents. It seems easier to just invest at home.
It’s been proven that diversifying your shareholding is the best way to improve returns. You can continue to invest on home ground, but consider putting at least some of your money into foreign markets. Your financial adviser can guide you on what level of risk is safe for you, and what specific markets you should be looking into.