virtual-market

All politics is local. Together with real estate and food. Regional is perhaps a better word. Despite all the rationalizing capacity we attribute to humans, we usually revert to our surroundings. This may not be so bad; take food for example: where would we be without the uncountable variations offered us by regional cuisines? A miserable world indeed.

In constructing equity portfolios, regional biases are usually not recommended but they persist anyway. It’s called “home bias”: Americans will have far more US equities than they should; Europeans hug local stocks. You could argue convincingly that in today’s world of global companies it does not really matter where their domicile is; also, countries are becoming less important and sectors should be the focus.

The above arguments though do not justify another form of “bias”: how investors in various locations embrace the idea of an equity-driven portfolio. The Financial Times had an excellent article last Saturday on the subject (Germans miss out on Dax bonanza as share ownership drops by third). I have been familiar with the issue for some time. As a simple observation, a 70/30 bond/stock portfolio in Italy is perceived as the equivalent of a 50/50 in the US. I pulled some figures from the CS Global Investment Returns Yearbook 2015 to see if history could justify these divergences; they are reported below.

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Focusing on the first two periods listed – after all, “In the long run we are all dead” -, it is striking how similar the German and US experiences have been; yet per the FT article German investors find equities “untrustworthy” or “speculative” in nature. Italians (included for my personal regional issues) are perhaps excused for their mistrust of equities though of course no one limits them to the local market. Neither Germans nor Italians (or other Europeans) make any sense to me when you see how much they focus and truly speculate on currencies – among the most unpredictable and return-less “things” around. While 30% in equities is “balanced”, 10-25% currency bets are considered normal manager prerogative. Rationality is out the window.

I don’t have a good answer to these observable skews in investor behavior: home bias, asset-class bias, structural local savings and pension laws, investment advisory business constraints, genetic or ancestral proclivities; who knows? The last 115 years afforded the US the trophy for best large market (best overall is Australia), but American large-caps are accessible and well known all over the world; they are sometimes even listed in local exchanges. Entrepreneurial spirit, greedy or not, is culturally more acceptable in certain societies (but what to make of the currency betting craze?). It’s further possible the answer lies with how society perceives short-term volatility. This does not validate the long-term argument. But if you just can’t lift your neck above the water line then maybe you really never will invest in stocks.

Whatever it may be, from an investor’s point of view it may cost dearly.

Photo source: investorchamp.com, independent advisor.