HH You’re A Biased Investor

America

It never fails. I recently returned from a cruise vacation, and of course, standing out on deck watching whales, glaciers and the coastal terrain of Alaska drift past, the commentary among my little cluster of fellow passengers fell to, what else?

The stock market, of course.

But I noticed something in my chats. Someone would talk about all the usual FANG suspects: Facebook (FB), Amazon (AMZN) and Apple (AAPL), Netflix (NFLX), and Google (GOOGL), or perhaps General Electric (GE) or IBM (IBM). You name it — all of them U.S. companies.

But raise the idea of investing in Europe or Asia, where valuations are lower and stock prices cheaper?

The good-natured silence spoke volumes. My cruise friends were displaying that most human of human investor traits — what financial types call “home country bias.”

An Unsurprising Trend

Earlier this year, the International Monetary Fund (IMF) polled investors in various countries and found an unsurprising trend: Investors in a particular country love stocks within their own borders, allocating the vast majority of their funds to those companies.

But invest their money outside those borders? Meh.

In the IMF’s Coordinated Portfolio Investment Survey, U.S. investors put 70% of their funds into U.S. stocks. Canadian and Australian investors showed the same kind of bias.

We all have a natural tendency to want to invest in our home countries. We’re more familiar with them. And when we talk to our friends and relatives (or people on a cruise), they’re familiar with them too, which adds another level of psychological comfort.

Price Paid, Value Received

The heavy allocation to U.S. stocks made sense up until recently. In 2009, the S&P 500 was priced on the cheap, relative to the corporate profits produced by its component companies. The Federal Reserve was all in on engineering a rebound in the economy.

Today, though, with the S&P 500 at new all-time highs, purchasing the same index of stocks is like buying the most expensive house on the nicest street in town. It’ll make you feel good, but you’re paying a heavy premium for the experience.

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