Home Bias

Home bias is the tendency for investors to favor domestic equities over foreign ones, often resulting in portfolios heavily weighted toward companies from their own country. This preference can limit diversification and expose investors to country-specific risks.

Key takeaways

• Home bias leads investors to overweight domestic stocks and underweight international opportunities.
• Causes include familiarity, perceived barriers (costs, regulation, transparency), and behavioral preferences.
• Home bias is common among individual and professional investors alike and varies by generation.
• Modern investment vehicles (ETFs, mutual funds) and information access make international diversification easier and lower-cost.
• International investing can offer diversification benefits and tax considerations, but also introduces currency and geopolitical risks.

What causes home bias?

Common drivers include:
* Familiarity and comfort with local companies and markets.
Perceived or actual transaction costs, regulatory hurdles, and limited access to foreign markets.
Lack of transparency and information about overseas firms.
Behavioral preferences and cognitive biases among both retail investors and some professional managers.
Local-market attachments: fund managers often overweight stocks from their home region.

How prevalent is it?

Home bias is widespread globally. For example, U.S. equities make up roughly 60% of global market capitalization, yet many Americans concentrate far more of their portfolios domestically. Studies and industry surveys indicate significant generational differences: older cohorts tend to show stronger home bias than younger ones.

Impact on portfolios

Diversification: Relying mainly on domestic stocks reduces exposure to uncorrelated returns available in other countries, increasing vulnerability to country-specific downturns.
Systemic risk: While some risks are non-diversifiable, geographic diversification can reduce the impact of domestic economic shocks if foreign markets are not perfectly correlated.
Globalization: Increasing economic interconnection has raised correlations across markets, which can weaken—but does not eliminate—diversification benefits.
Taxation: Investing abroad can entail foreign taxes; U.S. investors, for example, may offset double taxation via the foreign tax credit depending on circumstances.

Practical considerations for investors

• Use low-cost international ETFs or mutual funds to gain diversified exposure without the complexities of individual foreign-stock trading.
• Evaluate correlation, not just country labels—seek markets offering true diversification relative to your domestic holdings.
• Account for currency risk and political/regulatory differences when sizing international allocations.
• Consider tax implications (withholding taxes, foreign tax credits) and consult a tax advisor if needed.
• Avoid overconcentration by setting a target international allocation aligned with your risk tolerance and investment goals.

Conclusion

Home bias is a common behavioral tendency that can reduce portfolio diversification and increase exposure to domestic shocks. While familiarity and practical barriers historically reinforced the bias, modern investment vehicles and global information flows make international diversification more accessible. Thoughtful allocation to foreign markets—balanced with an understanding of currency, tax, and geopolitical risks—can improve long-term portfolio resilience.

Further reading

• Charles Schwab, “Fundamentals of behavioral finance: Home bias”
• SSRN, “No Place Like Home: Familiarity in Mutual Fund Manager Portfolio Choice”
• Springer Link, “The home bias and the local bias: A survey”