Patriotism is Killing Your Portfolio

Unless you’re an American, in which case you are still too patriotic, but much less patriotic thanĀ people from other countries.

The tendency to invest in your own country’s assets is known asĀ home bias.

I’m writing about home bias because recently, when I was on vacation in Seattle (and watching the best DotA players in the world), it occurred to me that I have no idea how much of a portfolio a person in a country not called America is supposed to have in their home market versus the rest of the world. Americans routinely have foreign equity exposure of something like 20-40% of their equity portfolios. That strikes me as very reasonable from a gut-check level. On the other hand, I have no idea how much people from, for instance, England, France, Japan, or Australia have in their portfolios, I have no idea what is recommended by professional advisors, and I have no idea what is theoretically optimal.

I pondered for a few weeks after I got back, then I started looking. As far as google — about all I could find was a bunch of USA-centric portfolios that were ‘adapted’ for other countries (replacing the S&P 500 with the FTSE 100, for instance), something struck me as obviously inappropriate given the relative sizes of our economies.

A little further research provided me with almost nothing in the way of recommendations from professionals (although it was incredibly easy to find free high quality advice for Americans). I’ll disclaim now — while I’m usually pretty good at interneting, it is possible I missed some obvious sources or that the sources I was seeking did not show up because I’m in America.

However, fortunately for us mortals, what financial advisors have seriously neglected, economists have been puzzling over for years.
Continue reading “Patriotism is Killing Your Portfolio”