Home Bias: Investing Too Close to Home

Why investors everywhere put most of their money in their own country's stocks, and in their own employer, and what this means for risk.

Global stock markets offer thousands of companies in dozens of countries. Yet investors in almost every country keep most of their money in domestic shares. This is called home bias.

The evidence

In 1991, economists Kenneth French and James Poterba showed that investors in the US, Japan and the UK held the overwhelming majority of their stock investments at home, far more than their countries’ share of world markets would suggest.

Indian investors also invest overwhelmingly in Indian stocks. Partly this is due to rules limiting overseas investment, but it also reflects preferences.

Why it happens

Familiarity: people prefer companies and brands they know.
Information: investors feel they understand local companies better.
Currency risk: foreign investments add exchange rate uncertainty.
Costs and rules: investing abroad may be more expensive or restricted.
Patriotism and comfort.

The risk

If your job, home and investments all depend on one economy, a downturn hits you from all sides.
Missing out on global diversification can increase risk without increasing return.

The extreme case: employer stock

Some people invest heavily in their own employer’s shares. When the US energy company Enron collapsed in 2001, many employees lost both their jobs and much of their retirement savings, which was invested in Enron stock.

Balancing it

Some home bias can be sensible: your future spending is in your home currency, and costs may be lower. But many advisers suggest some international diversification. Indian investors can use international mutual funds or ETFs, within limits set by regulators.

Everything in one basket

An employee at an Indian IT company holds most of her savings in her employer's shares and other Indian IT stocks. When the sector suffers a downturn, her job feels less secure and her savings fall at the same time.

Thinking knowing a company well makes it less risky

Familiarity can create a false sense of safety. Risk depends on diversification, not how well you know a brand.

Key takeaways

Home bias means investing mainly in one's own country's stocks.
Familiarity, information, currency risk and costs drive it.
It concentrates risk, especially when jobs and investments depend on the same economy.
Heavy investment in employer stock can be very risky, as Enron showed.