Call it patriotic…
Call it lazy…
But most people stick close to home when it comes to investing.
This is called home-country bias, and it’s a phenomenon that’s too big to ignore.
It’s pervasive across time and geography.
And even though it makes investors feel all warm and fuzzy inside, it generally tricks us into accepting lower returns and higher volatility from domestically-tilted portfolios.
In the U.S., this is particularly prevalent.
Americans prefer to invest in U.S. stocks because, psychologically, it feels like the right thing to do.
But it’s not!
Yes, U.S. stocks have trounced foreign stocks for years now.
But, just because U.S. stocks have outperformed for the past decade does not mean they have alwaysoutperformed… nor that they always will.
U.S. stocks outperform foreign stocks only about half the time.
Following the logic, a portfolio that is always concentrated in U.S. stocks is guaranteed to underperform about half the time.
The trick is not to extrapolate the past into the future and assume U.S. stocks will outperform for the next 10 years, just because they have for the last 10.
In fact, anyone who assumed U.S. stocks would outperform in 2017, has so far been quite disappointed.
A number of foreign stock markets have proven to be better bets.
But, buying foreign stocks is something most investors don’t feel comfortable doing. Tying up hard-earned capital in foreign stock plays feels riskier. But in reality, it isn’t…. in fact, it’s a necessity.
I’m not necessarily a proponent of buying foreign stocks and holding them indefinitely.
But I do use a forward-looking algorithm to identify pockets of outperformance opportunity in foreign stock markets – “sweet spots,” if you will.
Looking at the annualized return of foreign stocks while in these “sweet spots,” compared to their annualized return the rest of the time, can be quite tantalizing.
