Investors tend to think ‘invest in what we know.’ I think there’s something to be said for understanding what we are investing in, however, the issue is we might concentrate our investments in U.S. stocks because we know companies like Amazon, Walgreens, and IBM and we’re comfortable with them; while we’re hesitant of investing our money in a foreign company who’s name we can’t pronounce. This is known as “home-country bias” and it’s not just observed here in the U.S. with American companies, it’s observed across countries around the world.
I pulled out the first table from this DFA article (however, because of its size it’s probably best viewed in the attached PDF). A neat thing to do is to focus on one color and see how it jumps around year after year – this is the returns for a specific country every year going back to 1997. The light blue of USA and the dark blue of Switzerland are two easy colors to follow. 13 of these 21 developed countries had the best performing stock market in a given year, and no country was the best performer for more than two consecutive years.
It’s difficult to know which markets will outperform from year to year, so by holding a globally diversified portfolio (which we do) we are well positioned to capture returns wherever they occur – we get the good with the bad, but over the long-term we get a lot more good than bad and that approach builds wealth for our retirement.
