+ Home Bias: The Hidden Risk in Your Portfolio +
++ Overweighting your home market feels comfortable but concentrates risk. Here’s why it happens + and how to diversify without creating tax headaches. +
+
+
+ Bias Check
+
+ If your country is less than 10% of global market cap but more than 50% of your portfolio,
+ you’re taking concentrated country and currency risk.
+
+
+
+
+ What is Home Bias?
++ Home bias is the tendency to hold a far larger share of domestic stocks than their global + weight. Investors in the US, UK, Canada, Sweden, India, and Australia all exhibit this behavior + despite different market sizes. +
+ +Why It Happens
+-
+
- + Familiarity: You know the brands and news cycle. + +
- + Currency needs: You expect to spend in your local currency. + +
- + Access & regulation: Some brokers limit foreign listings (PRIIPs/UCITS). + +
- + Tax frictions: Forms, withholding tax, and paperwork discourage global + exposure. + +
Why It’s Risky
+-
+
- + Country/sector concentration (e.g., US tech, Canadian financials/energy, Swedish industrials) + +
- Currency risk without diversification benefits +
- Policy and regulatory risk (capital controls, tax changes) +
- Missed growth in other regions and sectors +
Fixing Home Bias (Practical Steps)
+-
+
- Measure: compare your country weight to global cap weights (ACWI/FTSE All-World). +
- Adopt a global core: one All-World ETF (VWCE, VT, VWRA, DHHF) or IWDA+EMIM combo. +
- Set a deliberate tilt: e.g., 20% home, 80% global. Rebalance to policy, not headlines. +
- + Match currency to liabilities: keep cash for near-term local spending; hedge bonds where + available. + +
- Use local wrappers to handle tax but hold global funds inside them when allowed. +
Tax & Wrapper Considerations
++ You can stay globally diversified while using local tax shelters. The key is picking the right + share class and domicile: +
+-
+
- + US: Avoid PFICs; prefer US-domiciled ETFs in IRAs/401k. Consider foreign tax credits in + taxable. + +
- + UK/EU: UCITS ETFs (PRIIPs compliant). Accumulating classes reduce admin in many systems. + +
- Canada: US-domiciled ETFs in RRSP may reduce withholding; TFSA does not. +
- + Sweden: ISK/KF simplify reporting; IE-domiciled ETFs help withholding compared to + US-domiciled. + +
- + Australia/NZ: Use Super for tax efficiency; outside, consider broad local + global ETFs. + +
Evidence & Further Reading
+-
+
- + MSCI, “The Home Bias Effect in Global Portfolios” —{' '} + + MSCI + + +
- + Vanguard Research, “Global equity investing: The benefits of diversification” —{' '} + + Vanguard + + +
- + Sercu & Vanpee (2012), “The home bias puzzle in equity portfolios” —{' '} + + Oxford University Press + + +
- + Fisher, Shah & Titman (2017), “Should you tilt your equity portfolio to smaller + countries?” —{' '} + + Journal of Portfolio Management + + +
- + Attig & Sy (2023), “Diversification during hard times” —{' '} + + Financial Analysts Journal + + +
- + Blanchett (2021), “Foreign revenue: A new world of risk exposures” —{' '} + + Journal of Portfolio Management + + +
- + Anarkulova, Cederburg & O’Doherty (2023), “Beyond the status quo: A critical assessment + of lifecycle investment advice” —{' '} + + SSRN + + +
- + Goetzmann (2004), “Will history rhyme?” —{' '} + + Journal of Portfolio Management + + +
- + Ritter (2012), “Is economic growth good for investors?” —{' '} + + Journal of Applied Corporate Finance + + +
- + French (2022), “Five things I know about investing” —{' '} + + Dimensional + + +
- + Bryan (2018), “World War 1 and global stock markets” —{' '} + + Global Financial Data + + +
- + Episode 200: Prof. Eugene Fama (2022) —{' '} + + Rational Reminder Podcast + + +
- + Merton (1973), “An intertemporal capital asset pricing model” —{' '} + + Econometrica + + +
+
+
+
+
+
+
+
+
+