The financial fallacy here is a concept known as “home bias”. It refers to the tendency for investors to lean toward investing heavily or solely in domestic companies, sometimes to the detriment of diversification. While patriotism might prompt some to invest in their local economy, financial decisions should be guided by individual financial goals, risk tolerance, and the pursuit of diversified investments.
Over-investing in domestic companies presents the risk of not being adequately diversified. For example, if a country’s economy takes a downturn, the investor’s portfolio could suffer heavily. On the other hand, international diversification allows investors to spread their risk across various economies, increase potential returns and decrease investment risk.
We tend to trust what we know, and our own countries feel more familiar to us than distant economies. It feels good to support what we love and believe in, and the narrative of helping our home country’s economy can be a compelling emotional case. However, investing should not be driven by emotional ties but rather by strategic thinking about risk and return.
An effective financial strategy should involve an understanding of the need for a diversified portfolio. This means spreading investments across different asset classes and geographies rather than investing excessively in one area. Diversification potentially offers a level of protection against financial losses because the poor performance of some investments will likely be offset by the acceptable performance of others.
“Global equity investing: The benefits of diversification and sizing your allocation” by Vanguard. Report link A comprehensive report explaining why and how to invest globally.
“International Financial Management” by Jeff Madura. Book Link. A textbook explaining various concepts in international finance, including the diversification of investments.
“Home Bias: What it is, How it Works, Special Considerations” in Investopedia. Article Link
“Equity home bias puzzle”. Wiki Link. This Wikipedia page gives a general overview of home bias and how it impacts investment decisions.