Why The Home Bias Can Be Very Dangerous In Investing
Whether it’s through public speaking or trying an exotic dish, venturing into the unfamiliar can eventually yield very positive results. Of course, despite the glaringly obvious potential rewards, leaving one’s comfort zone is a lot easier said than done. And we have the home bias largely to thank for that unease.
The home bias – which is known in academic circles as the familiarity heuristic – is a mental phenomenon first discovered by renowned psychologist Daniel Kahneman. It’s a well-documented shortcut our brains take that makes us feel calm with the familiar, and apprehensive about novel experiences – regardless of their advantages.
When it comes to investing, this home bias can deceptively lull us into feeling hesitant about decisions that could actually lead to less risk and greater returns.
For instance, U.S. investors are largely familiar with their domestic equities. After all, they live in the U.S., largely encounter U.S. products and companies, and mostly hear about U.S.-based benchmarks (like the S&P 500) on the news. As a result, they almost solely invest in these stocks (especially companies they’ve heard of before), and apprehensively ignore any foreign opportunities to grow their wealth.
Despite investors’ penchants to invest in their home country, nearly half the world’s investable opportunities are outside of it. Additionally, when the US stocks markets are doing poorly, international markets may still be growing. For example, between 1990 and 2014, international stocks outperformed domestic ones 11 out of 25 times in ten-year average returns.
A wise investor will realize that international investing can further diversify a portfolio to reduce risk. A globally diversified portfolio means investors can take advantage of a larger availability of investments, and enjoy the benefits of occasionally opposite performance.
At LexION Capital, we can focus on investments all across the globe as part of your portfolio. Want to learn more about our globalized approach? Let’s have a conversation today.