Advertisement
Australia markets closed
  • ALL ORDS

    8,153.70
    +80.10 (+0.99%)
     
  • ASX 200

    7,896.90
    +77.30 (+0.99%)
     
  • AUD/USD

    0.6524
    +0.0006 (+0.09%)
     
  • OIL

    83.11
    -0.06 (-0.07%)
     
  • GOLD

    2,254.80
    +16.40 (+0.73%)
     
  • Bitcoin AUD

    107,653.31
    -574.91 (-0.53%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • AUD/EUR

    0.6037
    +0.0003 (+0.05%)
     
  • AUD/NZD

    1.0901
    -0.0001 (-0.01%)
     
  • NZX 50

    12,105.29
    +94.63 (+0.79%)
     
  • NASDAQ

    18,254.69
    -26.15 (-0.14%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • Dow Jones

    39,807.37
    +47.29 (+0.12%)
     
  • DAX

    18,492.49
    +15.40 (+0.08%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • NIKKEI 225

    40,369.44
    +201.37 (+0.50%)
     

Investors: Don't Let Patriotism Rule Your Portfolio

Independence Day is just around the corner, and throughout the country, neighborhoods are proudly flying the stars and stripes of the national flag. At times like this, simply walking down a street, even an unfamiliar one, could make you feel safe and confident -- at home.

The same feelings often manifest themselves in investors' portfolios in what is known as home bias: the tendency to favor domestic equities over international equities.

A recent analysis by investment firm SigFig, for example, found that the median investor has 61 percent of his or her portfolio in domestic equities and just 6.6 percent in international equities. (The rest is in other asset classes, including fixed income, cash and cash equivalents, real estate investment trusts, etc.) Yet U.S. stocks represent just over 35 percent of the global equity market, which means that international publicly traded companies represent two-thirds of the world economy, at least as far as market capitalization is concerned.

One of the main factors behind home bias is a preference for investing in what you know and avoiding what you don't. "There is a mindset of buying stocks you are familiar with," says Sheryl Garrett, a financial planner and founder of the Garrett Planning Network. "Well, that's really hard to do when you're thinking of investing internationally. We might be familiar with Swiss chocolates, European vacations or German cars, but we don't know much about companies in even developed countries, and particularly in underdeveloped countries."

ADVERTISEMENT

Ironically, while ignoring international exposure might make an investor feel safer, its effect on a portfolio's volatility is quite the opposite. Because international markets don't necessarily move in the same direction as the U.S. market, adding international exposure to one's portfolio would lower its riskiness, not increase it.

Affluent investors (kind of) get it. Not everyone is equally averse to international stocks. In SigFig's data analysis, portfolio size was a key differentiator in how much exposure to international markets investors have.

Simply put, the larger a portfolio, the larger its international exposure. While the median international equity share of portfolios between $20,000 and $100,000 was 6.4 percent, that of portfolios between $100,000 and $400,000 was 8.4 percent. Portfolios of $20,000 or less had just 0.5 percent in international equity.

Millennials and Gen X-ers also get it. Whether it's growing up in the age of the Internet, entering the workforce when collaborating with global teams is par for the course or simply having more tolerance for risk (or what is perceived as risky, anyway), investors who are 20 to 39 years old have significantly more international exposure than investors who are 60 and older: 12.2 percent vs 8.1 percent of their portfolios, respectively.

Another possible reason is that older investors are simply less familiar with international equities, says Stella Huh, a data scientist at SigFig. "They were born in and lived in a time when the United States dominated the world economy," Huh says.

Keep your eyes on the long-term prize. Taking a disciplined approach is hard, especially when you compare how the U.S. stock markets have performed in recent years to those overseas. The Standard & Poor's 500 index gained 11.39 percent and 29.60 percent in 2014 and 2013, respectively (not including dividends), while in the same years, the MSCI Emerging Markets index fell 2.2 percent and 2.6 percent.

There are, of course, legitimate concerns with international investing: political uncertainties, accounting irregularities, corruption and conflict. That's normal. However, Garrett argues, countries behave much like companies: One country that used to be an emerging economy is now developed, and now others are coming along. "There are always going to be bad parts of the world that will be challenging, but that doesn't mean that we should ignore them," she says.

So how much of a portfolio should be in international investments? Depending on an individual's age, net worth, risk tolerance and other circumstances, Aaron Gubin, head of research and wealth management at SigFig, recommends investors hold at least 50 percent of their equity positions in international investments. "The markets are making a judgment call where to put their money," he says. "And global markets are saying 60 percent to 65 percent of our money should be in the rest of the world."

Aleksandra Todorova is a blogger for The Smarter Investor and editorial director at SigFig. You can connect with her on LinkedIn and follow her on Twitter.



More From US News & World Report