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 I Invest My Own Money
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?
