what is home bias 
the term home bias refers to the tendency for investors to invest the majority of their portfolio in domestic equities ignoring the benefits of diversifying into foreign equities this bias was originally believed to have arisen as a result of the extra difficulties associated with investing in foreign equities such as legal restrictions and additional transaction costs other investors may simply exhibit home bias due to a preference for investing in what they are already familiar with rather than moving into the unknown understanding home biashome bias is a phenomenon that generally occurs within equity markets it is commonly believed to be driven by emotions rather than objectivity investors with home bias tend to stick with investments with which they re familiar as such they ll invest in the stocks of domestic companies rather than those in foreign markets that s because these investors have a greater degree of comfort in choosing investments in their own country there are a number of factors that can lead an investor to favor domestic investments including u s equities represent about 60 of the global market according to charles schwab americans invest 85 of their portfolios in domestic equities research shows that some generations are more likely to experience home bias than others for instance as many as 45 of baby boomers have some form of home bias the largest group among those researched by charles schwab millennials were the least likely with only 24 of investors primarily focusing on u s markets 1home bias doesn t just apply to individual investors in fact some professional u s mutual fund managers are also likely to demonstrate the same behavioral biases in their portfolio decisions as individual investors in fact the study showed that the average fund tends to be overweight in stocks from its managers home states one important point to note is that the researchers found the bias to be stronger among managers who are less experienced 2home bias isn t restricted to american investors in fact investors from all over the world tend to be biased toward investing in their particular domestic equities including finland japan and germany and it s also common among investors who are more experienced and sophisticated 3special considerationssystemic risk is any risk that is associated with the entire segment of a market which means it doesn t impact one specific stock or sector while systematic risk is broadly believed to be non diversifiable in nature some investors hold a country specific view of systematic risk for them investments in foreign equities tend to lower the amount of systematic risk in a portfolio because foreign investments are less likely to be affected by domestic market changes home bias is also called country bias or familiarity bias home bias vs diversificationhome bias has historically been fuelled by the lack of available options and greater barriers to entering foreign markets mutual funds and exchange traded funds etfs now provide a relatively easy and low cost way to diversify across international investments that may otherwise be more difficult to access on their own moreover an internationally focussed financial media and the free flow of information make owning and monitoring foreign stocks much easier diversification reduces risk by allocating investments among various asset types geographic regions and industries it aims to maximize returns by investing across different areas to lessen the chance that a market event can have a debilitating effect on an entire portfolio some foreign markets tend to be less closely correlated with domestic performance for example an economic downturn in the u s economy may not negatively affect the economy in another country too dramatically holding equity investments in that country protects investors against losses that arise because of changes in the u s economy that being said the economies of different countries are becoming more intertwined because of globalization as such a downturn in one economy can impact others consider the impact of the subprime meltdown in the u s on other economies a large reason of course is that the u s economy is the largest in the world and touches most countries but it is important to pay attention to these factors when investing in foreign equities to determine if true diversification is being achieved investing in foreign markets can also be tax beneficial depending on the tax laws of the country that is being invested in many countries create beneficial tax laws for foreign investors particularly for investors in developed nations this is a common practice in emerging markets to attract investment and spur growth u s investors would still have to pay taxes on their profits earned abroad but may be able to benefit from the foreign tax credit the foreign tax credit avoids double taxation which is when the foreign country taxes the investments and so does the u s the foreign tax credit can reduce your tax liability on a dollar for dollar basis by the lower of the amount taxed in the foreign nation or the u s tax liability 