Why do investors hold so much of their own country?

Home bias is the tendency to hold far more of your own country's assets than its share of global markets would suggest. It is one of the most consistently documented patterns in finance — it shows up in every country studied, in every decade studied — and it is a genuinely two-sided phenomenon rather than a simple error.

The size of the gap

Rounded, illustrative figures for developed markets:

• The US is roughly 60% of global equity market capitalisation, and US investors have typically held around 80% of their equity at home.
• The UK is roughly 4% of global market cap; UK investors have historically held a quarter or more of their equity domestically.
• Canada and Australia are each roughly 2–3% of global market cap, and domestic investors in both have often held half or more at home.

Notice the pattern: the smaller the home market, the more extreme the bias in relative terms. A US investor overweighting home by 20 points is overweight by a factor of about 1.3. A Canadian investor at 50% domestic is overweight by a factor of roughly 20.

The defensible reasons

Home bias is not purely irrational. Real reasons exist:

• Liabilities are in the home currency. If you will spend euros, euro-denominated assets match your future costs. This is the strongest argument, and it is why it applies far more to bonds than to equities.
• Tax. Dividend withholding, treaty relief and domestic tax-advantaged wrappers frequently favour home holdings. This is a genuine, quantifiable cash difference.
• Costs. Foreign investing historically carried higher fees, custody costs and frictions. Much less true now than in 1990, but not zero.
• Information and governance. Familiarity with home accounting standards, disclosure regimes and legal protections is worth something real.

The cost side

What the bias buys is concentration in one economy — and that concentration comes with a sector shape you did not choose. A UK-heavy equity portfolio has historically been heavy in energy, financials and staples, and very light in technology. A Canadian one has been heavy in financials and resources. That is not an opinion about those sectors; it is what the index happens to contain.

The illustration everyone reaches for is Japan. At the end of the 1980s, Japanese equities were roughly 40% of the entire world's equity market capitalisation — a larger share than the US at the time. A Japanese investor holding, say, 90% domestic looked ordinary by local convention. The Nikkei 225 peaked near 38,900 in December 1989 and did not regain that level until February 2024 — more than 34 years later.

A globally diversified investor experienced Japan's lost decades as a drag on part of the portfolio. A fully home-biased Japanese investor experienced them as the whole portfolio. Same asset, radically different outcome, decided entirely by concentration.

This is emphatically not a claim that any particular country's investors should hold any particular fraction abroad. It is the identification of the risk that home bias concentrates: you have made a large, unhedged bet on one economy, one currency and one sector mix — and it deserves to be a conscious bet rather than an accidental one.

In the data

Where a share trades is not where the company is. Vodafone, a British company listed in London, trades on three other markets too:

Each line has its own price, currency and trading calendar, so two rows in a portfolio can be one company. A home-exposure count built from where each line trades would file the New York receipt as American and the Frankfurt line as German, when all four are the same UK business.

Try it now

1. Two of the blocks below, over their full histories: the US market, then developed markets outside it. Same asset class, same decades, different economies — note how differently the two lines behave across the span.

2. Find the longest stretch where one substantially lagged the other, and count the years. A globally spread investor lived that stretch as a drag on part of the portfolio; a fully home-biased one lived it as the whole portfolio.
3. Look up your own country's approximate share of global equity market capitalisation and compare it with a typical domestic allocation there. Describe the gap as a number, without judging it.