What is home bias?
Home bias is the tendency of investors to hold far more investments from their own country than its share of the world market would suggest. A German investor with half of a stock portfolio in German companies is strongly home-biased: Germany makes up only around 2–3% of the world's stock market value.
Home bias is found in virtually every country, among private and professional investors alike.
How it is measured
Home bias compares the foreign share of a portfolio with the foreign share of the world market:
A value of 0 means the portfolio holds as much abroad as the world market does; a value of 1 means it holds nothing abroad at all. A simpler comparison is the over-weight: the domestic share of the portfolio divided by the domestic share of a world index.
A simple illustration
A German investor holds 40% of a stock portfolio in German companies. Germany's share of the world market is about 2%, so the foreign share of the world market is about 98%:
The German share of the portfolio is twenty times Germany's weight in the world market.
Why investors do it
- Familiarity. Well-known domestic companies feel safer and easier to understand, even when they are not.
- Costs and access, historically: foreign shares used to be more expensive to buy and hold. Global ETFs have largely removed this reason.
- Currency. Domestic investments carry no exchange-rate risk for a local investor — a real but partial argument, stronger for bonds than for stocks.
- Taxes. Withholding tax on foreign dividends is a nuisance, even where part of it can be credited.
What it costs
- Less diversification. A home market depends on one economy, one political system and a particular mix of sectors. The DAX, for example, has few large technology companies and many industrial and automotive ones.
- Doubled exposure. A home-biased investor's job, home and pension already depend on the domestic economy; a domestic portfolio adds to the same risk instead of balancing it.
- Long bad stretches. Individual countries have gone through decades of poor stock returns — Japan after 1989 is the best-known example — that a global portfolio would have diluted.
A moderate tilt toward the home market can be a reasonable choice. The problem is an unintended one, which a regional allocation makes visible.
A worked example
Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.
Am I too concentrated in one country?
Top country exposures — see the table below.
| Country | Value (EUR) | Weight (%) |
|---|---|---|
| United States | 61.613,63 € | 44,33% |
| Germany | 18.261,78 € | 13,14% |
| Unclassified | 18.199,01 € | 13,09% |
What this means: a single-country share above 30% is often described as concentrated; above 50% is usually described as very concentrated. The country breakdown shown covers 86,91% of your portfolio and 13,09% is Unclassified, so the numbers reflect only the available coverage.
Use the table and these thresholds to judge whether your top-country weight feels high for you.
Related topics
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