Many DIY investors have been accused of having home country bias when choosing their investments, especially those who are dividend-growth investors.

What is home country bias?  According to Investopedia, it is the tendency to overweight domestic holdings at the expense of foreign securities.  These investors do not diversify their portfolios, which could have a negative impact on their overall returns.

Related: How well are your investments performing?

Financial writer Dan Bortolotti states that investors all over the world feel safer holding domestic stocks and feel they are less risky.  He cites a survey that found Canadians concentrate 74 percent of their equities in Canadian stocks, which, he says is comparable to other countries.

The preference for local firms is often due to a variety of reasons.

Familiarity

People like to stick with what they know.  We are familiar with the “big 5” banks, telecoms, utilities, and large resource companies.

We hear about Canadian companies on news reports.  We see and deal with these companies all the time. If the long morning line-ups at my local Tim’s drive-through suddenly diminish, I’d be wondering if something was up.

Related: The three C’s of Canadian investors

Employment bias

My friends who work in the oil patch have significant holdings in energy stocks – sometimes buying small companies that I personally would consider risky, but they know the industry.  Likewise, employees of other industries tend to favour their own.

Many employers provide incentives for employees to invest in their company.  This often leads to an oversized position in a portfolio.

A 2001 study found that Coca-Cola employees invested 76 percent of their retirement contributions in Coca-Cola shares, and only 16 percent thought it to be risky.

Related: Be an owner, not a moaner. Why you should own bank and utility stocks

I also find myself over weighted in bank stock from my employee savings plan.

Access to information

I have to admit that I dislike doing research.  If the information is not readily available I will not do a lot of searching.

Information can be difficult to access for foreign equities, particularly in less developed markets.  Disclosure regulations may not be as strict as what we are familiar with.

Taxation

We know of the availability of the tax credit for eligible Canadian dividends in non-registered accounts. Foreign equities may be subject to double taxation – withholding tax at the source as well as being taxed as income at home.

Related: Why U.S. stocks are safer than Canadian stocks

U.S. securities are exempt from withholding tax in RRSP accounts.  However, if you hold U.S. or other foreign equities through a Canadian listed mutual fund or ETF you could pay withholding taxes, even in your RRSP.

Final thoughts

Keeping all investments in a domestic market can result in missed opportunities. We’ve had a good run with Canadian equities in the last few years and the U.S. market is now doing well.

In the past, markets in Asia – especially Japan – and emerging countries all had extended bull markets.  You need to be diversified if you want to take advantage of world market cycles.

Dividend stock investors can easily buy stock in U.S. companies and may consider American Depository Receipts for foreign content.  A simpler way is to hold a diversified portfolio of index mutual funds or ETFs.

Related: How to get started with dividend investing

Canadian Couch Potato has several model portfolios that are worth checking out.

Personally, I hold dividend stock in Canadian companies, and diversify with holdings in mutual funds and ETFs in various fixed income, global and sector products.

Is your portfolio diversified geographically, or do you suffer from home country bias?

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8 Comments

  1. My Own Advisor on August 20, 2014 at 4:52 am

    I want to own more U.S. stocks and international ETFs, I just find the prices too high right now.

    I would like a small crash.

    Mark

    • Boomer on August 20, 2014 at 10:51 am

      Hi Mark. I don’t know about trying to time the market – although I suppose we’re all guilty of trying to do that – but I do think the US is due for a correction.

      I have done well over the years just using dollar cost averaging.

    • Bernie on August 23, 2014 at 11:47 am

      Mark,

      While it may be difficult to find an ETF “on sale” you can always find a bargain when choosing an individual stock if you do some digging. Case in point, Target (TGT) is priced 6% below it’s fair value price according to Morningstar. This may not seem like much but TGT is a dividend growth champion that has increased it’s dividend greater than 20% annually for over 47 years in a row.

  2. Grant on August 20, 2014 at 6:17 am

    Mark, you wouldn’t be trying to time the market would you?!:)

    Actually, the valuations for international and especially emerging markets are lower (and therefore expected returns are higher) than for the both the Canadian and US market at the moment.

    I have 1/3 each in the Canadian/US/international markets (wiht 1/3 of international in emerging markets) using ETFs, so similar to you, Marie, a home bias but also diversified globally.

    • Boomer on August 20, 2014 at 10:55 am

      Hi Grant. I do believe you are right about international markets still being lower priced and emerging markets are coming down off their recent boom.

      Glad to hear that my investing style is not so weird after all if at least one other person is similar 🙂

  3. Ron Suter on August 20, 2014 at 7:48 am

    I have a strong country bias in my portfolio. One risk that was not mentioned was currency risk which has been significant with US stocks over the past decade. I am also suspicious of accounting and reporting principles in many other jurisdictions and this keeps me investing at home where I feel comfortable and mostly know when I read an annual report or an earnings report that the data is substantially real.

    • Boomer on August 20, 2014 at 11:00 am

      @Ron Suter: You are right about currency risk. One reason why I don’t have individual US stocks is the past 60 cents on the US dollar conversion rate. That, and the 20-30% foreign content restrictions that were on RRSPs.

      Also, as a dividend investor I don’t care to have my returns reduced by withholding taxes in my non-RRSP.

  4. Robert on August 20, 2014 at 11:44 am

    I have some home-country bias and I think it is not all bad. It is much easier to get a feel for where a local company is going, and makes it more likely you can get to the investor meetings. It also removes currency fluctuation from the equation unless one plans to use the savings elsewhere later.

    I started beefing up my USA holdings 3 or 4 years ago, and plan to continue for a few years as I was badly underweight in them. I am painlessly moving dividends from local stocks I have enough of into that market via my RRSP. I do not consider this purely as a play away from home. For starters, I can still get to an investor meeting if I want and the USA news is copious. Their currency is normally stronger than ours, so currency risk is minimized. And we have some nice reciprocal tax agreements if the stocks are inside an RRSP.

    Canadian stocks are overweight in a few sectors. By going to the USA one can buy a company like Dupont or Pfizer or P&G or Intel, which have few such comparable old dependable equivalents in Canada. They simply allow more diversification than native stocks, if you like that sort of thing.

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