Why Investors Stick Close To Home

We celebrate Canada officially once a year, kicking off the summer season. But, in our portfolios, many of us tend to show our love for this country year round. It's a phenomenon known as home country bias.

According to RBC Global Asset Management (RBC GAM), Canadian investors tend to hold most of their assets within the domestic market, particularly when it comes to equities. Canadians, RBC GAM notes, hold almost 60 per cent of their equities here in Canada. It's something that happens globally, too.

Why do investors stick close to home? RBC GAM points out three common reasons:

1. Heightened expectations

Investors tend to have a more optimistic view of their domestic economy than foreign investors. This may lead to heightened return expectations for one's own home market and can feed into a desire to invest close to home.

2. A fondness for what's familiar

Have a favourite local home-renovation or grocery store? Maybe a much-frequented fast-food outlet or retailer? Investors often develop a sense of familiarity with stores and business models. Seeing long lines in-person might make an investor more comfortable with investing in a domestic outlet than in its global equivalent.

3. To offset liabilities

Investments are sometimes designed to offset an investor's future liability — a child's education, a cottage or retirement, for example. Because costs associated with these are often influenced by domestic inflation and interest rates, some investors who hold domestic assets may find they move in tandem with these costs.

Home sweet home?

As one writer details in Is Buying Local Always the Best Strategy?, regional restrictions may be limiting, be it in your portfolio or on your dinner plate. For investors, it's important to be aware of home country bias and what it can mean for portfolio diversification.

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