Given my wife’s Irish heritage, we decided it’s high time to show our boys the beauty of Ireland, especially since the U.S. dollar has surged relative to most other currencies in the last year. Sure, the trip will take a bit more work to pull together versus going to the beach again, but there’s a good chance that the payoff will be big too. Thinking of traveling outside the States brought to mind something that many U.S. investor portfolios should also address: home bias.
Home bias for investing
What is investment home bias? It’s the tendency to invest in your home country. You know many of the names in the S&P 500 or the NASDAQ, so it’s easy to buy funds that invest in those names. As with heading to that familiar beach or mountain retreat in the summer, such investing is easy and comfortable. But maybe there’s something even more enticing out there you just don’t know about. And it might be outside our borders.
A bigger world for investing
For all its heft, the United States makes up only about half the market capitalization (or value) of the world stock markets. Yet U.S. investors put less than 30% of their investment dollars outside the States. In raw numbers, there are about 2,500 American companies to invest in. Include the world, and the number rises to about 8,500.
To invest only in the United States means playing a game with only part of the deck. Thinking bigger and broader means you expand the opportunity set. Plus, historically, such diversification can reduce portfolio volatility, offering the potential of a smoother ride over the long term.
Costs of U.S.-centric investing
Some argue that the United States is the best place to invest. I believe it’s a great place too, but the markets tend to efficiently gauge attraction with pricing, meaning that “great place” moniker has earned the United States a higher valuation. This translates into higher prices versus some other opportunities.
Vanguard’s valuation model suggests international markets offer a somewhat better return outlook than the United States over the next ten years. But recognize that it’s difficult to time when to move between different investments (often called market timing). You’re better served building a diverse portfolio and keeping your asset allocation stable—either by rebalancing it regularly or using portfolio cash flows in or out to keep it on target.
Broadening investment borders
Is it difficult to invest outside the United States? Not anymore. There are many mutual funds and ETFs that offer foreign exposure as easily as a U.S. fund. And now the cost of these funds is not much different from U.S.-focused funds.
So think about investing some of your money outside the United States for a change, and reduce your home bias. It might be highly rewarding. Oh, and that goes for your vacations too.