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Why Stay Home?

It's frankly difficult to find sensible arguments for a home country bias. Most of the reasons investors overweight U.S. stocks have to do with fear, discomfort, lack of experience, and inertia. The one argument for a home country bias that I hear from investors I (otherwise) respect goes something like this: I am domiciled in the United States and must discharge my liabilities in U.S. dollars. Therefore, a portfolio overweight in U.S. dollar-denominated assets makes sense for me.

Well, maybe. But this argument doesn't carry as much water as you might think. For one thing, outside the marketable equity portion of most investors' portfolios, almost all assets are U.S.-dollar denominated (fixed income, private equity and real estate, for example), thus reducing the need to focus on dollar-denominated equities. For another, diversifying into non-dollar-denominated assets adds only a small amount of short-term volatility to our returns (currency fluctuations tend to even out over time), while adding a very large amount of diversification. Thus, our net risk is probably reduced.

Given all the arguments favoring a global approach to equity investing, and the paucity of arguments against it, why shouldn't we simply accept global equities as an asset class that should replace domestic equities and international equities in our asset allocation strategies? The answer, it turns out, is that global investing is a great idea in theory, but its advantages begin to dissipate along ...