Автор: Kazrak
Home country bias in investing
In fact, some investors likely would continue to invest in a favorite home-country company even if a similar foreign company had demonstrated better upside potential. Home country bias occurs when people include a large percentage of stock from their own countries in their portfolios. If you look at the average person's asset allocation , you will see that investors of all sizes have a strong propensity to overweight their exposure to domestic stocks.
This bias is one reason that building a powerful brand in today's interdependent global market is so important. Coca-Cola, Google, and Toyota, for example, all are well-known international brands, and most people, no matter where they live, are inclined to buy their stocks.
Home country bias can cause an investor to build an unbalanced portfolio that lacks diversification and is subject to unnecessary risk. Is Home Country Bias Detrimental? Naturally, people take comfort in the familiar.
Thus, it follows that investors select companies they know and trust. However, investors who do not recognize this bias in themselves may end up with unbalanced portfolios and ignoring one of the cardinal tenets of investing: diversification.
By not diversifying with international securities , an investor could create weakness in their portfolio if their home country suffers a serious economic decline. Or the investor could simply miss out on foreign investment opportunities. There are significant diversification benefits to a well-constructed international portfolio.
Special Considerations for Home Country Bias As with many investing prejudices, overcoming home country bias requires thoughtful intention and determined discipline. No problem: Diversify globally. Returns Are Like Lightning Strikes. The problem is, we never know ahead of time which stocks those will be, or which countries they will come from.
Again, the solution is clear: Diversify globally. Adding international equities to a portfolio tends to decrease volatility risk and increase expected returns. Market Cap Weights and Measures So, the amount of global diversification matters. But to what extent? Allocating more than that actually increased volatility. In other words, there is definitely an incremental benefit to adding non-Canadian stocks to a Canadian portfolio.
Vanguard found similar results for other countries. That said, modelling expected volatility is not the only thing to think about when building a portfolio. But we can see that using market cap percentages alone for geographic allocations is not necessarily the best way to reduce volatility for an investor in a given country. So far, we have seen that global diversification is important, but the benefits from a volatility reduction perspective can be achieved while still maintaining a substantial home country bias.
The concept of home bias gets more interesting when we start thinking about some of the other factors that impact investment outcomes. Minimizing volatility and gaining long-term access to foreign economies are good things, but real-life investors also need to think about costs, taxes, and their own behaviour.
All Costs Considered The cost of index ETFs has continuously fallen in recent history, to the point that investing is almost free in terms of management expense ratios. They can buy its U. When we get outside of North America, the fees do get higher. Canadian public companies generally distribute eligible dividends. An eligible Canadian dividend received by a Canadian taxpayer is taxed more favourably than a foreign dividend in a taxable investment account.
In , at the highest marginal tax rate in Ontario, an eligible dividend is taxed at A foreign dividend is taxed as regular income at a rate of This is a meaningful difference for a taxable investor. When a dividend is paid to a foreign asset owner, there is generally a withholding tax applied.
The U. In a taxable investment account, this foreign withholding tax is recoverable; it can be used to offset your Canadian taxes. In a registered account, this foreign withholding tax is not recoverable.
What are the costs involved? XEF: The situation is similar, with an estimated unrecoverable foreign withholding tax of 0. The result is one level of unrecoverable foreign withholding tax estimated at 0. Some of these unrecoverable foreign withholding tax costs can be reduced or eliminated by holding U.
But this solution introduces the added complexity of converting currency to purchase U. It is very important to understand, this is not such a bad thing. The point is, in both taxable and non-taxable accounts, owning non-Canadian stocks comes with an added level of tax cost. This means there is little question that Canadian stocks are more tax-efficient than non-Canadian stocks.
That was a bit of a tax digression, but it is important. Investing outside of Canada comes with higher costs and taxes for a Canadian investor.
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But investors have a range of ways to invest internationally and tailor their approaches to pursue their goals with their own tolerance for risk in mind. In this effort, country ETFs can be a powerful tool. Country funds might require more diligent monitoring, but the precision exposure offered by them enables tremendous flexibility in the range of applications and level of sophistication.
Learn more about investing where you see potential with ETFs. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments.
Diversification and asset allocation may not protect against market risk or loss of principal. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Further, why are their millionaire early retirees willing to accept healthcare subsidies? Somehow, their conversation leaked. If you need to give her more things to do because you are feeling pressure about your crappy longtime record on diversity — which, by the way, I know personally from the female side of it — like, go for it.
Just find it somewhere else. You are not going to find it from me or by taking my thing away. Difficult to blame her. Most people would think and act the same way, which is why change is slow. For those who are entrenched in power or who got a head start, it is only natural for these people to take care of their friends and family. Therefore, if you are outside the circle of power, you must work harder and strategize better to get ahead.
One of the main reasons why I built a rental property portfolio is to take care of my children in case they cannot launch. Worst case, they can live in one of the rental properties while they figure out their lives. Best case, they are fine on their own and end up managing the properties for passive income.
No matter who you are, you will face challenges. Do what you can to plan ahead. Optimism Reigns Supreme Investors who exhibit home country bias with their investments tend to be more optimistic about their domestic markets and indifferent or more pessimistic toward foreign markets. In other words, we tend to believe we are smarter, better looking, harder working, and more productive than we actually are!
This is the Dunning-Kruger Effect in action. The reason why some first-generation immigrants excel is because they appreciate how good they have it in their new country. Perspective matters. I used to work in international equities, specifically covering the Asian ex-Japan markets.
I also lived in Taiwan and Malaysia for elementary and middle school. My bias for these Asian companies was due to my upbringing and my work experience. I was optimistic about the growth of the Asian markets and especially Taiwanese and Chinese tech companies. As my time away from working in finance grew, so did the decline in my exposure to Asian equities.
In the unlikely event that China invades Taiwan, both Chinese and Taiwanese equities will plummet. Therefore, domestic investors in China, Taiwan, and Asia overall should probably consider reducing their home country bias.
More Capital Should Flow To The United States Some believe home country bias can cause an investor to build an unbalanced portfolio that lacks diversification and is subject to unnecessary risk. The main country to invest in is The United States Of America, which has outperformed most other countries since the pandemic began. During times of war, the United States looks even more attractive because it has the most powerful military to protect its citizens.
Therefore, I expect more foreigners to buy more U. I fully expect foreign investors to gobble up a lot more U. The pandemic throttled foreign demand for U. But now the pent-up demand is too great. If you are not a U.
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