Via Alex Thomson
Call it patriotic…
Call it lazy…
But most people stick close to home when it comes to investing. This is called home-country bias, and it’s a phenomenon that’s too big to ignore. It’s pervasive across time and geography. And even though it makes investors feel all warm and fuzzy inside, it generally tricks us into accepting lower returns and higher volatility from domestically-tilted portfolios.
In the US, this is particularly prevalent. Americans prefer to invest in US stocks because, psychologically, it feels like the right thing to do.
But it’s not!
Yes, US stocks have trounced foreign stocks for years now. But, just because US stocks have outperformed for the past decade does not mean they have always outperformed… nor that they always will.
US stocks outperform foreign stocks only about half the time.
Following the logic, a portfolio that is always concentrated in US stocks is guaranteed to underperform about half the time.
The trick is not to extrapolate the past into the future and assume US stocks will outperform for the next 10 years, just because they have for the last 10.
In fact, anyone who assumed US stocks would outperform in 2017, has so far been quite disappointed. A number of foreign stock markets have proven to be better bets. But, buying foreign stocks is something most investors don’t feel comfortable doing. Tying up hard-earned capital in foreign stock plays feels riskier. But in reality, it isn’t…. in fact, it’s a necessity.
I’m not necessarily a proponent of buying foreign stocks and holding them indefinitely. But I do use a forward-looking algorithm to identify pockets of outperformance opportunity in foreign stock markets – “sweet spots,” if you will.
Looking at the annualized return of foreign stocks while in these “sweet spots,” compared to their annualized return the rest of the time, can be quite tantalizing. In our latest infographic, How Investors are Falling Short on Their Returns, I look at several different reasons why falling prey to the phenomenon of home-biased investing will NOT always get you the returns you’re seeking… while it will ALWAYS result in you missing out on some lucrative opportunities.
Check out the infographic below to learn just how pervasive this phenomenon is and what you can do to ensure you’re not a victim!
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