Home Market Bias

By Slow Dad - February 27, 2017

Investment decisions should be well informed, data driven ones. Decisions made from fear, ignorance, or bias lead to suboptimal asset allocations.
It seems to be a universal tendency for people to believe that whichever corner of the globe they happen to originate from or currently reside in is the best place in the world.

This attitude regularly drives tourist facing taxi drivers, resort workers, and baristas to despair. Apart from being marginally insulting to those within earshot who were not fortunate to share a similarly defined geographic outlook, in many cases it is just plain wrong... particularly when it comes to investing.

Not everyone can be right all the time

Think about that for a second, they can’t all be right.

There are a clichéd set of dubious arguments justifying this position that regularly trotted out by investors.

I understand the place, the tax regime, the motivators, etc”.

I think in terms of currency [insert your favourite currency here], so want to minimise my currency risk by denominating a significant proportion of my assets in the aforementioned currency”.

I’m planning to retire in [insert your favourite country here], so don’t want to deal with the hassle/risk/effort required to factor in multiple markets, currencies, tax jurisdictions, and so on”.

To illustrate why most of those excuses are wrong consider the chart below from the Credit Suisse Global Investment Returns Yearbook 2017. The chart compares the global stock market composition as it looked at the start of 1900 and at the start of 2017.

Global Market Capitalisation Proportions

Despite what the asset allocations of many Australian and United Kingdom based investors would have you believe, their relative market capitalisations are closer to rounding errors than significant proportions of the global stock market in 2017.

Similarly many US investors think the world ends at their border, such an attitude is overlooking nearly half the global stock market!

Such a blinkered, one eyed perspective can have a significant impact on returns achieved by investors.

Good decisions are well informed, data driven ones.

The Yearbook publishes a chart that sets out the relative performance of equities, bonds, and bills split by country over the last 116 years. It is eye opening. For example over that period the annualised after inflation South Africa market return is a massive 9 times the corresponding return achieved by the Italian market!

How would you be feeling if you possessed an Italian home market bias, proclaiming it to be the absolute best, most robust and reliable stock market in the world? Sounds stupid right? No disrespect intended to Italian investors, it has been my experience they tend to be amongst the most scathing of their stock market's performance!

Now think about how you sound when you’re talking up the prospects of your own market, or arguing that you don’t need exposure to the big wide world because your domestic market contains listed stocks that export globally.

Of course any such sample is always going to be skewed by the base year chosen for the comparison. Fortunately the Yearbook also provides the information required to perform a similar comparative evaluation over periods of 2000-2016, 1967-2016, and 1900-2016. To save you a bit of Excel grunt work I’ve turned those other time series data sets into the charts below.

So what?

Personally I believe each individual investor has the right to pick and choose their holdings and biases, given that they will personally need to live with the consequences of those decisions. However I also believe that such decisions should be informed data driven ones, rather than blindly being made based upon prejudice, fear, or ignorance.

Today the numerous low cost index tracker funds and ETFs options available make the adoption of a globally diversified portfolio allocation a trivial exercise. For many investors this should be the default position, but an exceptional one... if for no other reason that it goes some way to mitigate things like regulatory risks and voters making spectacularly stupid decisions.

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