How your home bias is killing your investment returns
Do you only invest in the in the country where you live?
If you do you are not alone but it’s a BIG mistake as it limits your
investment opportunities and gives you lower returns.
You are simply fishing in a pond that’s too small.
Why do we all do this?
In theory I am sure you agree that increasing the number of companies
(including more countries) in your investment universe can only help your
returns.
But it’s not easy to do.
We all think that where we live its safe, we think we know the companies
better and it feels comfortable.
But is this true?
Every country has problems
Be honest, every country has had its problems in terms of accounting fraud
and other scams. If you don’t believe me take a look at all the investment
frauds and scams in your country over the past five year.
It will be a sobering experience as I found here in Germany.
That is why you should spread your investments over as many companies,
industries and countries.
If its 50% cheaper
Also, as long as a country is not a complete banana republic, and you can
buy a company there for 50% or even cheaper than in your home country you
are definitely paid well for taking on the risk of PERHAPS somewhat
more relaxed accounting rules, if at all.
You are not alone
If you mainly invest at home you are not alone.
The 2016 research paper
The buck stops here: The global case for strategic asset allocation and
an examination of home bias
by the fund manager Vanguard contained this chart:

Source: The buck stops here: The global case for strategic asset
allocation and an examination of home bias - Vanguard – July 2016
Investors in the USA don’t look too bad. BUT this is only because they have the largest stock market.
Investors in Canada don’t seem to trust their US neighbours much but the
Australians look by far the worse in terms of home bias.
Germany was not listed, probably because it hasn’t got much of an equity
culture, but I am sure it would be just as bad.
What the worst thing that can happen? You can lose everything
What can happen if you don’t diversify across countries, you may be
thinking.
You can get wiped out.
Yes you can get wiped out as happened to stock and bond investors in
Germany and Russia around the 1920’s. I admit it’s an extreme example and
is relatively unlikely.
But even if it is the fact remains that the bond and stock markets of
countries perform very differently.
Think of the US market outperforming most markets over the 10 years after
the financial crisis. This is great but is unlikely to do so over the next
10 years because the market has become overvalued.
No one knows what world market will perform best so spreading your
investments world-wide is the best strategy.
Does investing worldwide work?
But does investing worldwide work? Isn’t it risky?
It works very well as a proven in a 2019 research paper by the investment
firm Bridgewater Associates ($124.7 billion assets under management) called
Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios
Are Highly Geographically Concentrated
.
The following charts show the stock and bond market returns of various
countries including an equal country weight portfolio.

Source: Bridgewater Associates -
Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios
Are Highly Geographically Concentrated
Red line = Equal weight portfolio
Dark Grey line = USA
Light Grey lines = Individual countries
The reason the equal weight portfolio (Red line) does so well because it
has lower drawdowns. This gives you more consistent returns which lead to
faster compounding of your money.
This following chart clearly shows the lower drawdowns of the
world-wide equal weight portfolio (Red line):

Source: Bridgewater Associates -
Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios
Are Highly Geographically Concentrated
Red line = Equal weight portfolio
Dark Grey line = USA
Light Grey lines = Individual countries
Another research report
Here is a second research report that proves investing world-wide gives you
higher returns.
It’s a research paper written by James Montier called Going global: value investing without boundaries and was
published on 16 September 2008 when James was working for the French bank
Societe Generale in London.
Does global value investing work?
James wrote the paper after he was asked if he has ever seen any research
that proves that value investing works at the global level.
With the paper he wanted to prove his idea that an investor should be allowed to invest anywhere in the world where
the most attractive investment opportunities can be found.
Great fund managers have shown it works
This is of course not a new idea as several great value investors such as
Sir John Templeton
and
Jean-Marie Eveillard
have shown that value investing works very well if done on a global basis.
As Sir John said:
It seems to be common sense that if you are going to search for these
unusually good bargains, you wouldn’t just search in Canada.
If you search just in Canada, you will find some, or if you search just
in the United States, you will find some. But why not search
everywhere? That’s what we’ve been doing for forty years; we search
anywhere in the world” (speaking in 1979).#
The European evidence
The chart below shows that investing across Europe would have given you
higher returns (look at the last bar) and proves that
expanding your boundaries across Europe can improve your returns.

All developed markets evidence
Across three developed markets (Europe, the US and Japan) you can see that
investing in ALL developed countries would have given you the highest
returns (look at the last bar) apart from Japan.

Conclusion, global investing works
So as you have seen global investing works.
This means it’s definitely a great idea to look for the companies that best
fit you investment strategy irrespective of where in the world they are.
If you do this your portfolio will not look like most of your friends or
any of the investment funds your friends are invested in. But you shouldn’t
care (I definitely don’t) because as you can see your returns will be a lot
higher and your drawdowns lower.
Best of all its easy to implement, just widen your investment universe and
start investing worldwide.
You don't have to go all out immidiately
You don’t have to go all out and do it immediately, start with a few
investments and go from there as you feel comfortable.
If you are very worried start with smaller positions.
PS
To implement a worldwide investment strategy in your portfolio
sign up for the Quant Investing stock screener by clicking here
.
PPS
It is so easy to forget and put things off why don’t you sign up right now?