March Client Letter

Home Bias Reframed

“The Yankees did not whip us in the field,” one Confederate leader ruefully insisted. “We were whipped in the Treasury department.” ~ WSJ

For this month’s client letter, I chose to write about ‘home bias.’ As you’re likely aware, ‘home bias’ means you own a disproportionate number of stocks in your own country rather than diversifying globally. Most investors in most countries have a home bias. Notably, Americans have a slight justification for home bias. Our stock market makes up about 55% of the global market.

After the events of the past week, the knee jerk reaction for most any investor is likely to lean into home bias. The world is a scary place! Countries invade one another! It’s better to stick with what you know and what you’re comfortable with, right?

Yet, the risks are obvious as we peer into an uncertain future. Imagine how a Russian investor feels right now knowing their money is tied up in local companies. According to Jeffrey Kleintop, Charles Schwab’s Chief Global Investment Strategist, Russian residents have over 90% of their portfolio in Russian companies. To compare, US residents’ allocation to US stocks is around 75%. (As an aside, I’m curious where the UK falls on this chart, especially since we have a number of UK subscribers. Also, why wasn’t it included?!)

Source: Charles Schwab

Yet, investing is rarely linear, and, at first glance, the results are often counterintuitive. Investors were shocked as stocks rallied from March 2020 well into 2021. Yet, in hindsight, most of the rally was justified.

Likewise, you may be shocked to see the following year-to date returns. Despite the war, US stocks have still been the worst performer in 2022 and emerging market stocks are down less than 5% despite an allocation to Russia.

• S&P 500: -8.01%

• Nasdaq: -12.1%

• MSCI EAFE Index: -6.52%

• MSCI Emerging Markets Index: -4.83%

Your clients may think that the correct conclusion to draw from Russia’s invasion of Ukraine is to lean into home bias. U.S. stocks sure seem safer right now, don’t they? Yet, I think the more accurate conclusion is just the oppositive. In fact, I think long-term investors should lean away from home bias and into global diversification.

Global diversification does the following:

• Smooths the multi-decade ride of investing

• Reduces portfolio volatility

• Decreases the risk of catastrophic loss in your home country’s stock market.

Putin’s ill-conceived war does not disprove the pro-diversification thesis so much as it affirms it.

The Russian economy is in for a world of hurt with these sanctions. My clients never cared when I brought up the Weimar Republic and the risks of home bias. The present example, devastating and tragic in its consequences, will feel more intuitive and relevant.

Your cause is righteous. Keep up the amazing work.