The study that measured how much we over-invest in our own country
In 1991, economists Kenneth French and James Poterba published a landmark study on the composition of investment portfolios in the world's major economies. Their finding was stark: American investors held around 94% of their stock portfolios in U.S. companies, Japanese investors around 98% in Japanese companies, and British investors around 82% in UK companies, far above what each country's relative weight in the global economy would objectively justify.
This 'home preference' or 'home bias' contradicts one of the most solid principles of portfolio theory: diversifying globally reduces total risk with barely any sacrifice in expected return. And yet, familiarity with the local outweighs that rational argument, systematically.
Why familiarity gets mistaken for safety
Psychologists Sarah Lichtenstein and Paul Slovic documented in several studies during the 1970s that people tend to perceive what feels familiar as less risky, even when familiarity provides no real information about actual risk. Knowing a company's name, seeing its ads daily, or working there generates a sense of control and understanding that, in practice, does nothing to reduce the real risk of concentrating too large a share of your wealth in it.
This is the same mechanism, at a different scale, as the 'illusion of control' we saw in the chapter on overconfidence: feeling like you understand something better because you know it isn't the same as actually reducing the risk of depending on it.
The most painful example: Enron employees and their retirement plans
at the time of Enron's 2001 collapse, a very significant share of its employees' retirement plans was invested in the company's own stock, in some cases more than 60% of their total retirement savings. When Enron filed for bankruptcy, those employees didn't just lose their jobs: they simultaneously lost most of the savings they'd accumulated over their entire working lives, concentrated in the exact same risk that had just materialized.
It's the most extreme example of a logic that applies, on a smaller scale, to millions of people: when your income and your wealth depend on the same source (your employer), any problem affecting that source hits you twice, not once. Diversifying your investments away from your own employer isn't an act of disloyalty or a lack of confidence: it's simply avoiding duplicating the same risk.
Why diversifying outside your own country also reduces real risk
The same logic from the Enron example applies, on a larger scale, to concentrating your entire portfolio in companies from your own country: if your salary, your home, and your future public pension already depend heavily on your country's economy, also concentrating your investments there multiplies your exposure to the same macroeconomic risks (a local recession, a currency crisis, a dominant sector in decline) instead of spreading them out.
A global ETF, like the ones we cover in our guide to ETFs, automatically spreads that exposure across thousands of companies in dozens of countries, reducing your dependence on your specific local economy doing well over the coming decades.
- Salary, home, and public pension already depend on your country's economy.
- Also concentrating your investments there multiplies that same risk instead of diversifying it.
- A global ETF spreads that exposure across thousands of companies in dozens of different countries.
How to protect yourself from your own home bias
The simplest and most effective rule is an explicit limit: never hold more than a small, reasonable percentage of your investable wealth in the stock of the company you work for, regardless of how much confidence it inspires. And, for the rest of your portfolio, prioritize funds or ETFs with global exposure instead of limiting yourself to companies from your own country, precisely because that familiarity doesn't reduce real risk, only the perception of it.
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Frequently Asked Questions
It's the tendency to concentrate investments in familiar assets (your own employer, your own country) instead of diversifying globally, documented by economists Kenneth French and James Poterba in a 1991 study.
The French and Poterba study found that American investors held around 94% of their portfolios in U.S. companies, Japanese investors around 98% in Japanese companies, and British investors around 82% in UK companies, far above their actual weight in the global economy.
Because it concentrates two separate risks (your job and your savings) in the same source. If the company runs into trouble, you can lose your job and a significant share of your wealth at the same time, as happened to thousands of Enron employees in 2001.
Yes. If your salary, home, and public pension already depend on your country's economy, investing there too multiplies your exposure to the same macroeconomic risks instead of spreading them across different economies.
As a prudent benchmark, a small percentage of your total investable wealth, regardless of how much confidence you have in the company, precisely because you already depend on it for your paycheck.