Most investors are probably less diversified than they think they are. For one thing, investing in U.S. companies with international sales exposure is not equivalent to international stock exposure. In addition, many major countries (like the U.S.) perform like just one sector of the stock market, leaving investors with a large home bias and potentially a lack of diversification. Finally, the start of a new economic cycle with a rising inflation outlook may signal a switch to international stock market outperformance in the years ahead.
When investors talk about the stock market, they are most often referring to an index that tracks stocks only in their home country. This home bias is often evident in the make-up of investors’ stock portfolios. Investors around the world tend to hold mostly domestic stocks, regardless of their country’s global market capitalization, as you can see in the chart below. U.S. investors, for example, tend to put 75% of their equity holdings in domestic stocks, despite U.S. stocks only making up 58% of global market capitalization. American investors with holdings based entirely in the U.S. are missing out on about half of the world’s investable universe.
Home bias: Investors’ portfolios tend to overweight their home country no matter where they live
Investors with a large home bias are not only concentrated geographically, but also may not be nearly as diversified across sectors as they believe and might risk missing their financial goals as longer-term trends shift with the start of a new global economic cycle.