No place like home?

In Alice in Wonderland’s financial world, bad news could mean up, and good news could mean down. It is not the news that matters. It is how the market perceives the news that is important. Good arguments can always be made for both the bull and bear cases which lead to plenty of opportunities in the markets. At the risk of sounding like a broken track record, the world is a big place full of investment opportunities.

I have given speeches on global market opportunities many times at many events over the years. Usually, I will ask investors one question. “How much of your investment portfolio is beyond your home border?” Guess what? The answer always varies but most of them have very low exposure to global markets.

Some investors are always wondering if they really need to invest outside the country. Whenever my capable financial partners who are experienced wealth advisors look at a prospective client’s investment portfolio, they rarely see one that is globally diversified.

Should anyone be surprised? When local investors talk about the stock market, they are generally referring to local stocks. My wealthy neighbor tells me all the time that she only believes in buying local properties.

Every country in the world suffers from this home country bias. What is “home bias”? Home bias is the tendency for investors to invest in a large amount of local investments despite the benefits of diversifying into other markets.

Well, they are not stupid people. It is just that most investors tend to invest in what they know. They tend to lean toward the familiar. Because it may also have to do with the way that people have been trained for such a long time to think about the investment process, some believe their favorite local investments will tend to outperform other opportunities – it is a “risky world” out there you know.

Home bias is not necessarily a bad thing as it is important to have a good understanding of your investments. However, it becomes damaging when the blinders are put on and people refrain from learning about other opportunities to take advantage of the changing economic and market conditions around the world.

Also, you are getting less diversification in your portfolio, and as a result, your portfolio is likely to have greater volatility and realize lower returns over the long-term. There is also opportunity cost. Let us take stock markets for example. By not investing outside your home border, you pass up opportunities to invest in other stock markets where valuations might be more attractive.

What about currency diversification? You might have noticed that the local currency has been looking a lot less triumphant. That means investments denominated in other currencies are worth more in local terms. Let us also not forget that there have been plenty of economic problems at home if you think there are problems in other parts of the world.

We are in a different world than 10 years ago in terms of how easy and effective it is to invest in anything globally. There are different ways in which you can invest in global markets without having too much trouble.

Most people get this feeling that things are easy when they first start investing. Global investing is simple. However that does not mean it is easy and please tell that to the snake oil salesperson who is sitting besides you now.

Ego often plays a role in our bigger mistakes. You are not a born CEO or investor or chess grandmaster. Nobody is great without hard work. Experience counts a lot in our business. If it were really that simple, anyone could become wealthy overnight. You cannot just jump in and instantly be successful.