Everybody loves to cheer for their home team when it comes to sports. But, it turns out that investors around the world do the same with their money.
Let me give you an example.
Brazil is suffering through its worst economic downturn since the Great Depression. Its currency, the real, is near record lows. And its stock market is down by 40% over the past five years. Add in other factors such as the Zika virus – and it’s bad times, to say the least.
But what are Brazilian investors doing? They’re liquidating their overseas holdings and buying Brazilian stocks.
Are they nuts?
Nope, it’s just human nature.
In investing, it’s called “home bias.” And U.S. investors are among the most guilty.
It’s Not 1950
In my years giving advice to clients, I found a very strong aversion among investors to investing overseas. People confuse familiarity with safety.
I once had a client who stormed out of the office saying he would never invest a penny of his money outside the United States.
Now, that was an extreme circumstance. But people do invest as if it’s still 1950, and the U.S. is the dominant economic power. Back then, the U.S. made up a huge part of the world’s market capitalization.
Today, that’s down to about 50%. Yet, people invest as if nothing’s changed.
A study by the mutual fund company Henderson Global Investors found that Americans were the second-most guilty of home bias globally, trailing only Canadians.
This is backed up by an analysis done last summer by robo-advisor SigFig. It found that the median individual investor had a mere 6.6% of their portfolio in international equities.
The study also found that bigger, and presumably more sophisticated, portfolios had less home bias.
This makes sense. I can guarantee, people like George Soros don’t have most of their portfolios in the U.S.
The World Is Waiting
The U.S. economy produced only 22.5% of the world’s GDP in 2014. That’s quite a change from just after World War II when the U.S. accounted for half of global GDP.
Overall, developed economies now make up less than half of global GDP. Developing economies now account for just over half.
Let’s just think about Asia for a moment – specifically China, India, and Indonesia. In terms of population, they rank first, second, and fourth respectively. The U.S. is third.
There are over 2.8 billion people in these three countries. Are you, as an investor, going to ignore them as if they don’t exist?
Wall Street wants you to. They want you to buy U.S. stocks. That’s why most Wall Street firms badmouth China every chance they get.
Use Your Common Sense
Investing overseas is really just common sense.
Most people wouldn’t put 100% of their money into one stock. Nor would they limit themselves to stocks from Pennsylvania just because they live in that state.
Why then would you limit yourself to just one country? My favorite analogy is that it would be like grocery shopping in only one aisle of the store.
But investors continue shopping in one aisle. Home bias remains a big problem for even financial professionals.
The toughest sell remains getting clients to diversify. Many stubbornly cling to putting all or most of their eggs into one basket.
At a conference for registered investment advisors in November, Charles Schwab’s Jeff Kleintop said, “That’s exactly the opposite of what they should be doing now.”
Now Is the Time to Diversify
I would put the emphasis on the word now. The U.S. market has outperformed international markets since 2009. I can assure you it won’t continue.
Markets will revert to the mean. In simple terms, underperforming markets will begin outperforming – and vice versa. As someone who has been in the investment business since the 1980s, I can tell you it’s a basic fact of financial markets. It’s like the sun rising and setting every day.
Many markets – particularly the emerging ones – are at valuations not seen in decades. That’s thanks largely to U.S. fund managers selling. In other words, home bias.
I think it’ll be a lot easier and more profitable to find companies that are serving those 2.8 billion-plus consumers in Asia, than finding an undiscovered gem in the U.S. The mass of Wall Street research makes that near possible, except for an occasional penny stock.
I’d like to end with a piece of advice from famed investor, Jim Rogers. He said you should wait until you see money lying in the corner and all you have to do is go over and pick it up. That describes overseas markets right now more than the U.S.