*Investors everywhere hold far more of their own country's companies than any rational allocation would suggest. They do so in every country, which tells you the reason is not the country.*
If an investor allocated their holdings across the world's companies in proportion to their value, they would end up distributed across many countries, with each country's share reflecting its share of global markets. Almost no one does this. Investors in every country examined hold far more of their own country's companies than any such calculation would suggest, and the pattern is so consistent that it has its own name.
The universality of the pattern is the most revealing thing about it. If investors in a single country overweighted their own market, one might suppose they had identified something attractive about it. But investors in every country do this, and they cannot all be right, since their conclusions contradict one another. Two investors, each confident their own market deserves an outsized allocation, cannot both be making a reasoned assessment of the same world.
The explanation lies in familiarity rather than analysis, and familiarity is not a form of information. A person knows the companies in their own country. They encounter the brands, they read about the enterprises in their news, they understand the language in which the reports are written, and they have a general sense of how the economy is faring. This produces a feeling of understanding, and the feeling of understanding is easily mistaken for actual knowledge that confers an advantage. It rarely does.
There are legitimate reasons for some degree of domestic weighting, and they should be acknowledged before the criticism proceeds. An investor's future obligations are generally denominated in their own currency, and holding assets in that currency avoids the risk that exchange rates move against them at an inconvenient moment. Domestic holdings may carry tax advantages in some jurisdictions, and costs of access to foreign markets, while much reduced, are not always zero. These considerations justify a tilt. They do not remotely justify the magnitude of the tilt that is actually observed.
The cost of the bias is that it converts a diversified-looking portfolio into a concentrated bet on a single economy, a single currency, a single regulatory regime, and a single mix of industries, and it does so invisibly. The investor holding fifty domestic companies feels diversified, because they own fifty things. They are diversified against the failure of any one company. They are not diversified at all against anything that affects their country as a whole, and the events that damage portfolios most severely tend to be exactly of that kind.
This is where the Japanese experience, examined elsewhere in this series, becomes directly relevant rather than merely historical. A Japanese investor in 1989, holding a broad basket of domestic companies, would have felt well diversified by every measure available to them. They owned many businesses across many industries. What they actually owned was a single position in the Japanese economy, and it took some thirty-four years to return to its starting point. An investor holding a globally distributed portfolio experienced the same period entirely differently.
The uncomfortable implication is that the investor who feels most confident about their home market is not thereby protected. The Japanese consensus of the late 1980s was not a foolish one held by ignorant people; it was the considered view of informed participants who understood their own economy far better than any foreigner did. Their superior familiarity did not save them. It was, if anything, part of what persuaded them to concentrate.
The bias is reinforced by the way market information is presented, and this is worth noticing because it operates continuously and beneath conscious attention. News in any country reports that country's index as though it were the market. Commentary discusses domestic companies as though they were the available universe. An investor absorbing this coverage is not being lied to, but they are being shown a small portion of the world and permitted to mistake it for the whole, day after day, until the distortion becomes invisible.
The remedy is straightforward to state and requires no forecasting ability whatever, which is what recommends it. An investor can hold a globally diversified allocation through readily available instruments at very low cost, and doing so does not require any view about which countries will prosper. It requires only the acknowledgement that one does not know, and that concentrating in the single market one happens to have been born near is not a conclusion arrived at through analysis.
It should be said that global diversification is not a guarantee of anything, and it should not be sold as one. Markets around the world have become more connected, and in severe crises they have tended to decline together, which reduces the protection that geographic spread provides in exactly the moments it would be most welcome. What global diversification protects against is not a bad year everywhere. It protects against a bad thirty years in one place, which is the risk that ends plans.
There is a further form of the same bias, operating at a smaller scale, that deserves mention because it can be considerably more dangerous. Employees frequently hold substantial quantities of shares in the company that employs them, sometimes acquired through workplace schemes and sometimes purchased deliberately out of familiarity and loyalty. This concentrates two entirely separate exposures into a single source. If the company encounters serious difficulty, the employee may lose their income and a substantial portion of their savings simultaneously, at precisely the moment when the savings would be most needed. The familiarity that makes the holding feel safe is the same familiarity that produced the concentration, and it offers no protection whatever against the event that matters. This is home bias in its most concentrated and least defensible form, and it has ruined a great many people who believed they simply understood their employer well.
At VESTFY™ home bias is presented as the most widespread and least examined concentration that ordinary investors hold. It does not feel like a bet. It feels like prudence, like sticking to what one knows, and that feeling is precisely what allows it to persist unexamined in portfolios that are otherwise carefully constructed.