April 22, 2024
Investments

Fisher Investments Reviews the Risks of Home Country Bias in Investing | Insights


Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher discusses how  “home country bias” can affect investors’ ability to reach their long-term financial goals. As Ken explains, it’s natural for investors to prefer stocks or bonds from their own country—or region—because of their familiarity. However, Ken says this approach can limit an investor’s ability to properly diversify their portfolio, and, may come at an opportunity cost.

By owning a variety of countries and categories, Ken says investors can protect their portfolio from shifts in market leadership and gain exposure to broader global trends.

Transcript

Ken Fisher:

Home country bias is something that people ask about. Sometimes it’s a jargon phrase. It means a preference to own the stocks, or sometimes other things like bonds or whatever, from your own country over those of other countries. And it’s natural to see why home country bias exists, simply because we’re more familiar with things in our immediate vicinity and experience. And simultaneously, the farther away we go from home, the stranger things seem.

So, for example, people in Europe will have home country bias, but then they’ll often also have more comfort and familiarity with adjacent countries that are closer to them. But, they interact with more often than, let’s say, places far away from Europe. And that makes sense, too. And you can understand why. The danger is that when you think about diversification and risk, each country has its own qualities and varies often greatly from other countries in the world as a whole. So you take American’s land of the free, home of the brave.

It’s easy to see, particularly in recent times where the S&P has done so well compared to the non US world. Why people might have home country bias that leads them to believe you don’t need to think globally. You only need to think domestically. Just on the S&P 500. Doesn’t it do better than foreign indexes? And the answer is yes and no. It is absolutely true that the S&P 500 has done better than foreign indexes, but that’s not 100%, but almost 100% because of the huge overweight that’s in tech in the US market.

Since US is the epicenter of tech, and tech having done better than almost anything over the last ten years. Tech being a subset of growth. And then when you think about a world that might shift for fundamental reasons from growth to value, that would hurt us and help the places that are overweighted to value again, that would be much more like Europe. And so, if you’re only exposed to the US, then you would underperform. If you’re in Europe these years and you had home country bias in these recent years where tech had done so well, the only real growth. Exposure that has done well has been not singularly, but almost singularly.

High end consumer durables, most particularly in France and Italy and a little bit in Spain and in that, you’ve underperformed because they’re smaller weights. Tech isn’t much there, and the value portion of the world has lagged where they tend to be strong, particularly in economically sensitive industrials. So the point that I’m making is. It’s fine to you to say at any point in time, this is the categories or the single stocks that I think will do best. That’s a rational thing to say, but it’s also rational to remember that you always should know you might be wrong and that you should always own. And this is classic portfolio theory from the time I was born.

You should also always own some things that you don’t think will do well, but would do well in an environment where the things that you actually think will do well don’t, so that you’ve got a counterbalance against the things that you think should lead. That’s what portfolio management risk control is all about. And that speaks to not being singularly focused on your own home country. And that speaks to recognizing the fact that countries all around the world have their own features that may complement or counter trend the features you like in your own country. And you should think to diversify more broadly than home country bias leads you to.

Thank you for listening to me today, I appreciate it. Hi, this is Ken Fisher. Subscribe to the Fisher Investment YouTube channel. If you like what you’ve seen, click the bell to be notified as soon as we publish new videos.



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