Prejudiced, but not offended by the charge of "home country bias."

I’m far from a financial genius—but a financial dope?

They told me I was short-sighted—and implied I was an investment fool—to have what in the business is called “home country bias.”  Home country bias is, in effect, the propensity of investors to deploy most, if not all, of their portfolio in securities of the country where they live.  This happened when I attended a half-day conference that focused on the financial outlook for investors for the up-coming year. 

At a panel of financial experts speaking about what to anticipate in the up-coming economic and investment climate, one of the closing remarks by one went something like this:  “You know, most investors manifest “home country bias” and thus pass up the chance to capitalize on the wonderful financial opportunities to make money that are happening in other countries all around the world—these kind of people are missing out on sweet financial returns and chance to be more successful investors.”  He didn’t put it in exactly those words, but that’s the essence of what he meant. 

How easy can it be to spot opportunity—anywhere?

After I reflected on it, I came to the conclusion that while he was the smart financial authority I’ll never be, I was smarter than he was on this one single issue:  I—and, apparently, most of my limited vision fellow investors—are not ashamed to have a healthy apprehension of high-stakes gambling with our investment-deployed dollars when it comes to international positions, the other-country “opportunities” in places like Getrichistan or Bricovia—or even France.  [Actually, maybe France in a particular way!]

The case for home country bias.

Here’s my logic in defense of home country bias:  These smart investment experts had taken up the better part of an hour and a half trying to make sense of what the future held, investment-wise, in the U.S. alone; and while they’d figured out some of the critical issues associated with investing here at “home,” they were far from cock-sure as to what sectors to “be in,” what the economic climate might be like, what was going to happen with interest rates, what government policy might be, and so on. 

So this is how I approach the matter:  If there’s no full, confident understanding of what the most advantageous financial picture is here at “home”—how in the world are investors like me to know what the best and most promising investment decisions are abroad...where we're even less knowledgeable? 

The short answer is this: it can’t reliably be done!

Remember, I was smart enough to know—right from the start of this—that I was in many ways the expert-inferior to all of the financial wizards on the panel.  Thus, I decided to check out what others in the field of finance thought about my conclusions regarding the practice of home country bias.  To that end, I easily found a soon-to-be-published article destined for the Journal of International Money and Finance, entitled “A rational explanation for home country bias,” by Iftekhar Hasan [New York University] and Yusif Simaan [Fordham University].  Here’s what their conclusions were:

Our analysis shows that…each market by itself constitutes a diversified portfolio and the difficulty in estimating international markets’ mean returns, make home dedication the preferred alternative.  The potential gains from international diversification are not uniform to investors living in different home countries.  For investors who live in large diversified economies, the gains from international diversification can be quickly outweighed by the negative impact of estimation errors.... [Underscore added for emphasis]

Were you paying attention?

Did you catch their point?  Home country bias may be the preferred alternative!  Iftekhar and Simaan go on to note that investors in small economies stand to gain more from international exposure than those like you and me—who already take part in a large diversified economy! 

So in the end, overcoming home country bias is good advice--but not for everyone.  And likely not for those who already have all the investment options we can barely handle—witness the inconclusive hour and a half discussion by my panel of experts chewing on the immediate financial promise of the U.S. economy alone. 

I’m prepared to concede Getrichistan and Bricovia.

If my experts couldn’t help me figure out [and I’m not really all that critical…no one else could have done much better] how to be successful at “home,” who’s to say what’s going to be so promising an investment strategy in Getrichistan or Bricovia?  Given the investment marketplace most of us can “shop” in here in the U.S., I think I’ll stick with the label of being home country biased.  When I reflect on it, I’m still pretty comfortable with that.  
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