Most of us suffer from a Home bias. We invest only in companies in our own country. Even here we may get biased towards our own city. For example I know at least one investor who will not touch a company registered in Delhi. He just does not like companies reg in Delhi. Bias? sure.

However even seasoned international players are guilty of this (if you call this a guilt). Warren Buffett who now advocates indexing for the common man (he has himself underperformed the index for 2 decades) does not believe that he needs an international portfolio. He is a US centric investor, but John Templeton made his money by diversifying. The typical American believes that USA has the best institutions -government, judiciary, etc. so there is no point in going out of USA. However Vanguard who believes in Indexing also runs a home bias. This is intriguing. If you believe in indexing, you should invest ONLY in the MSCI world Index fund!

If you are an U.S. investor (or US based investor) and have more than 53.5% of your equity allocation U.S. stocks you are practicing some form of home bias. You are not a purely passive investor – you are making an active decision to deviate from the global market portfolio. Most investors, regardless of their country and whether they know it or not, are practicing home bias in one form or another (if not in stocks then in bonds/REITs/etc.). Perhaps the most extreme example is Australians, who have a 66.5% weighting to their home country stocks while Australian equities make up only 2% of the global equity market. Even worse, Indian investors who have 90% in Indian stocks – when India makes up of just 1% of the Vanguard world portfolio.

Why does this happen? Simply because humans are humans. Not machines. Also advisers find it difficult to get people to invest abroad (its expensive), and in a growing home market pulling money out is difficult. Imagine 20 years ago if an American investor had invested in the Japanese ETF – he would have seen a 4% growth vs a 440% growth in his home market.  However, if you are an American you are hoping (hope is not strategy) that something like a market collapse should not happen to your portfolio.

What happens if you are an Indian? It could be worse – remember now you are running currency risk, international taxation, and an expensive option. I do suggest some international diversification, but after I see the client creating an equity net worth of at least 1 Million US $ in Indian liquid assets. Vanguard’s big boss – John Bogle – having advised and sold Index funds – keeps ALL HIS MONEY in the USA. He has a 60:40 ratio of equity: debt – completely in USA.

However when I say WB does not diversify internationally, I am not totally correct. When his insurance companies do underwriting from their London, Dubai and Singapore offices, they are doing international business. When WB invests in Coke and coke sells in India, WB is getting a slice of the Indian market. Yes, he is missing the Indian PE, and his investee companies are running currency risk et al.

So should you index? Is indexing passive (will tell you why it is not)? Do you need International diversification?

Tough questions. Tougher answers.

There is mounting international research evidence that international diversification helps. However, none of us do that. At least in a significant manner. John Bogle says “