Home bias in investing: why investors overweight domestic assets and what it costs

Home bias is the documented tendency for investors to hold a disproportionately large share of their portfolios in domestic assets relative to the domestic market's share of the global opportunity set. French and Poterba (1991) found that US investors held approximately 94% of their equity portfolios in US stocks at a time when the US represented roughly 36% of global market capitalisation. Similar patterns were documented in Japan (98% domestic holdings, 44% of global market cap), the UK (82% domestic, 10% of global market cap), and every other major market studied. Home bias is pervasive, persistent, and costly.

What home bias is

Modern portfolio theory predicts that a rational investor with access to global markets should hold a portfolio that approximates the global market portfolio—roughly proportional to each country's share of world market capitalisation. The logic is that each country offers different sources of return and risk, and holding only domestic assets fails to capture the diversification benefit of international exposure. In practice, investors in every country deviate dramatically from this prediction, holding far more of their home market than the theory suggests.

Home bias extends beyond equities. Investors also overweight domestic bonds, domestic real estate, and domestic currencies relative to their role in a globally diversified portfolio. The pattern is not unique to individual investors: institutional investors, including pension funds and sovereign wealth funds, show systematic home bias, though typically less extreme than retail investors. Cooper and Kaplanis (1994) confirmed that home bias is not explained by hedging domestic inflation or by barriers to international investment—suggesting the driver is primarily psychological.

How it manifests in investing

The most direct manifestation is a portfolio concentrated in the investor's domestic equity market. A Swiss investor who holds primarily Swiss equities has concentrated approximately 3% of world market cap in a single national market and is exposed to the economic performance of a single country, a single currency, and a handful of sectors in which Swiss companies are represented. The same pattern applies to investors in every country, including the US—though US investors have the particular feature that their home market is itself the world's largest, which moderates the cost of home bias compared to investors in smaller markets.

Huberman (2001) documented a local variant of home bias: investors systematically favour companies geographically close to them within their home country. Shareholders of regional US telephone companies—studied before consolidation—held a disproportionate share of their local carrier rather than diversified across all regional carriers. Familiarity, not any informational advantage or rational economic rationale, explained the pattern.

The cost

The cost of home bias depends on the relative performance of the home market versus global markets and on the diversification benefit lost. Over any given decade, home bias can help or hurt depending on whether the domestic market outperforms the global market. Over longer periods, the diversification cost is persistent: a portfolio that excludes international equities has higher volatility and lower risk-adjusted returns than a globally diversified one with the same expected return, because international returns are imperfectly correlated with domestic returns.

For investors in smaller markets—Switzerland, Australia, Canada, the Netherlands—the cost is particularly acute. These markets are dominated by a few sectors and a few large companies. A Swiss investor with pure domestic equity exposure has a portfolio that is heavily weighted toward pharmaceuticals, financial services, and food and beverages—with minimal technology, energy, or industrial exposure. The diversification cost of this concentration is measurable and real across most historical periods.

What helps

The structural solution to home bias is a systematic allocation process that defines portfolio weights based on objective criteria—factor exposure, expected return, or market capitalisation—rather than familiarity or convenience. A global index fund, by construction, holds each country in proportion to its market capitalisation and eliminates the home bias problem entirely. A systematic multi-asset strategy that selects assets based on momentum, value, and carry signals across the global opportunity set applies the same selection logic to domestic and international assets without privileging either. The bias diminishes when the decision framework removes nationality as a criterion.

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