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By Christine Benz | 10-18-2012 04:00 PM

Does Your Portfolio Have a Home-Country Bias?

U.S. investors are much more globally diversified than many investors abroad, but when it comes to fixed income, it pays to stay home, says Vanguard's Chris Philips.

Christine Benz: Hi, I am Christine Benz for Morningstar.com. Most investors throughout the world are biased toward their home markets. I recently sat down with Chris Philips who is a senior analyst in Vanguard's Investment Strategy Group to discuss some recent research on home-market bias.

Chris, thank you for being here.

Chris Philips: My pleasure.

Benz: You and the team here recently conducted some great research into home-market bias, the extent to which someone in, say, the U.S. has perhaps a disproportionate share of his or her portfolio in U.S. stocks. And you examined this issue, but let's start with home-country bias and what you found when you examined four markets. You looked at the extent to which investors in these four global markets were perhaps disproportionately exposed to their home country. You looked at the U.S., Canada, Australia, and the U.K. What did you find market-by-market?

Philips: So actually we went into this asking two questions. One, how much home bias is there? And two, whether it's rational or not to actually have it? So, what we found was that not surprisingly, the U.S. is at the lower end of home-country bias. Now, we're the largest country out there, so simple math would tell you that the more international stocks we hold, the ratio is just going to be much more in our favor.

What we found that was really interesting was, when you start looking at Australian investors, Canadian investors, U.K. investors, they have a disproportionate amount of holdings in their home country. Despite the fact that Australia might be 3% of the global marketplace, investors there have upwards of 70% exposure to Australian stocks. So we really wanted to dig into that, figure out why that is and whether it's irrational for these investors across all these domiciles to actually have that exposure.

Benz: So, backing up to the U.S. question, what you're saying is, the U.S. is a bigger portion of the global market. So, without even trying to go out and get global exposure, we automatically just have a bigger share of the global market?

Philips: Yes. If you start with 100% of your stocks in U.S. companies and you just move to 20% of that in foreign stocks, that's a significant portion of your portfolio. But because the U.S. is already such a large slice, it's not like we were 1% of the globe and we moved from 100% in the U.S. to 20% [foreign] where we're still significantly overweight. It's just the U.S. is very unique in the global marketplace, but that doesn't mean that investors shouldn't be aware of home-country bias and what impact that can have on a portfolio.

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