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ETF Specialist

Investing Close to Home Is Overrated

Foreign stocks have an important role to play.

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Most U.S. investors have a bias toward U.S. stocks. If the relative value of assets invested in U.S.-listed mutual funds and exchange-traded funds is any indication, the average U.S. investor allocated about 24% to foreign-stock funds and 76% to U.S.-stock funds at the end of June 2019 (this excludes sector and global funds). In contrast, U.S. stocks represented about 45% of the FTSE Global All Cap Index. It isn’t necessary to eliminate this bias toward U.S. stocks to reap the diversification benefits that foreign stocks offer. That said, foreign stocks should represent a considerable portion of most investors’ portfolios.

Home bias isn’t unique to U.S. investors, and it’s understandable. Domestic stocks tend to have less currency risk than foreign stocks, which tends to make them slightly less volatile and more appealing, as most investors’ expenditures are predominately in their home currency. And investors are generally more familiar with local stocks, which can make owning them feel more comfortable. But a heavy bias toward U.S. stocks can hurt diversification and is often based on misconceptions.

Alex Bryan has a position in the following securities mentioned above: EFAV. Find out about Morningstar’s editorial policies.