Americans traditionally construct portfolios with local companies because it feels good. We invest in companies we know because they are familiar and we believe in their viability.
This home country bias results in most Americans holding portfolios made up of predominantly U.S.-based investments. While this may result in a feeling of safety and familiarity, international investing returns have far exceeded those of U.S. markets (as measured by the Standard and Poors 500 index) over the past five years.
I developed my own American home country bias when I moved to the U.S. from Canada in 1988. Prior to moving, I invested heavily in Canada, which despite having numerous government safety nets from education to health care, represented a viable economy with an abundance of natural resources and strong trading activity.
Upon moving to the U.S., I found myself in the midst of a rebirth of the American spirit of unbridled capitalism. Real personal incomes were soaring. The U.S. economic engine spurred global growth for the next two decades.
According to the World Bank, the U.S. accounted for 30.1 percent of global GDP in 1987 with Japan at 16.2 percent, Germany at 6.6 percent and China at less than 2 percent. I fast became a U.S. investor and was confident that my new home country bias would serve me well.
However, the world picture kept changing.
By 2008, the U.S. share of GDP had fallen to 26.7 percent, while China climbed to 6.3 percent. World markets continued to outpace U.S. markets as well. In the past five years ended May 31, 2010, the U.S. markets (measured by S&P 500) were up 0.3 percent, while the Canadian markets were up 10.2 percent (as measured by MSCI Canada Index), developed markets (as measured by MSCI EAFE) were up 1.3 percent, emerging markets (as measured by MSCI EM) was up 22.7 percent.
Such global change is not anticipated to slow. In fact, the World Bank predicts that by 2030, China will climb to become the second largest economy in the world as measured by GDP with 15.5 percent share, the U.S. will decline to 22.8 percent and Germany will decline to 4 percent, tied with India and slightly behind of Japan at 5 percent.
The bottom line is – beware of your home country bias. Think globally – the trends are with you.