Ken Fisher, founder, chairman and co-chief investment officer of Fisher Investments, discusses how 'home country bias' can impact an investor's ability to achieve their long-term financial goals. I will tell you what is there. As Ken explains, it's natural for investors to prefer stocks and bonds from their own country or region because of familiarity. However, Ken says this approach can limit an investor's ability to properly diversify their portfolio and may have an opportunity cost.
Ken says that by owning a variety of countries and categories, investors can protect their portfolios from changes in market leadership and gain exposure to broader global trends.
transcript
Ken Fisher:
People often ask about home country bias. It may also be a technical term. This means prioritizing owning stocks, and sometimes bonds, in your own country over stocks in other countries. And it is natural to understand why home country bias exists. It's simply because we are more familiar with things and experiences around us. And at the same time, the further you get from home, the stranger things seem.
So, for example, people in Europe have prejudices against their own country, but they often also feel safer and more familiar with their closer neighbors. But they interact more often than, say, far from Europe. That's also natural. And I can understand why. When we think about diversification and risk, the danger is that each country has its own characteristics, and the world as a whole is often very different from other countries. In short, you have taken America, the land of the free and the home of the brave.
It's easy to see that the S&P has been doing very well compared to the rest of the world, especially recently. Why do people have prejudices against their own countries and believe that there is no need to think globally? You only have to think domestically. When it comes to the S&P 500, isn't it better than foreign indexes? And the answer is both yes and no. While it's completely true that the S&P 500 outperforms foreign indexes, it's not 100%, but close to 100%, as the US market is heavily weighted towards tech stocks.
Because the United States is a technology hub, and we've done it better than almost any other country over the past decade. Technology is part of growth. And if we think about a world that could move from growth to value for fundamental reasons, it would harm us and again help the regions that are too biased towards value, which would be good for Europe. It will be similar. Therefore, if you are only exposed to the US, you will perform poorly. If you've been in Europe for the last few years and there's been a bias towards your own country in the last few years when technology has been so strong, that's the only real growth. It's not just one exposure that pays off, it's almost one.
In luxury consumer durables, especially in France and Italy, and to a lesser extent in Spain, it underperforms due to its low weight. There isn't much technology, and valuable parts of the world, especially in economically sensitive industries, lag behind the trends that technology excels at. So what I'm trying to say is. You can always tell me that this is the category or individual stock that I think will do best. This is reasonable, but it is also reasonable to remember that you should always know that you could be wrong and that your opinion should always be your own. This is classic portfolio theory since I was born.
You should also always have a few things on hand that you think won't work, but might actually work in an environment where the things you think are going to work don't work. I think you should lead. That is risk management in portfolio management. And that tells you that you're not just focused on your home country. And that means recognizing the fact that countries around the world have unique features that complement what they like in their own country or counter trends. And we should think about broader diversification rather than prejudice towards our own country.
Thank you for listening to me today. Hello, my name is Ken Fisher. Subscribe to his YouTube channel at Fisher Investments. If you like what you see, click the bell to be notified as soon as new videos are published.
