It never fails. I recently returned from a cruise vacation, and of course, standing out on deck watching whales, glaciers and the coastal terrain of Alaska drift past, the commentary among my little cluster of fellow passengers fell to, what else?

The stock market, of course.

But I noticed something in my chats. Someone would talk about all the usual FANG suspects (Facebook, Amazon and Apple, Netflix, and Google), or perhaps General Electric or IBM. You name it — all of them U.S. companies.

But raise the idea of investing in Europe or Asia, where valuations are lower and stock prices cheaper?

The good-natured silence spoke volumes. My cruise friends were displaying that most human of human investor traits — what financial types call “home country bias.”

An Unsurprising Trend

Earlier this year, the International Monetary Fund (IMF) polled investors in various countries and found an unsurprising trend: Investors in a particular country love stocks within their own borders, allocating the vast majority of their funds to those companies.

But invest their money outside those borders? Meh.

In the IMF’s Coordinated Portfolio Investment Survey, U.S. investors put 70% of their funds into U.S. stocks. Canadian and Australian investors showed the same kind of bias.

We all have a natural tendency to want to invest in our home countries. We’re more familiar with them. And when we talk to our friends and relatives (or people on a cruise), they’re familiar with them too, which adds another level of psychological comfort.

Price Paid, Value Received

The heavy allocation to U.S. stocks made sense up until recently. In 2009, the S&P 500 was priced on the cheap, relative to the corporate profits produced by its component companies. The Federal Reserve was all in on engineering a rebound in the economy.

Today, though, with the S&P 500 at new all-time highs, purchasing the same index of stocks is like buying the most expensive house on the nicest street in town. It’ll make you feel good, but you’re paying a heavy premium for the experience.

Meanwhile, the newly remodeled fixer-uppers — with discounts to match — are hiding in plain sight just a few blocks away, waiting to be discovered by a new crop of buyers with an open mind and fresh cash.

For instance, the S&P 500’s price-to-earnings ratio, which is the price that investors pay relative to the index’s earnings, has only been higher a couple other times in the last century, namely 1929 and 2000. And for that risk, investors watched their stocks rise 8.4% in the last six months.

On the other hand, an investor in any number of international indexes has done much, much better:

S&P 500 8.4%
Mexico (S&P/BMV Index) 9.43%
Spain (Ibex 35 Index) 12.7%
Netherlands (AMX Index) 15.7%
Italy (FTSE MIB Index) 22.7%

Since 2011, most of the offshore world has been in a bear market because of, well, you name it — negative interest rates, troubles over Greece, Britain’s “Brexit” from the EU and a stubbornly tough economic environment. Companies have had to tighten their proverbial belts to stay in business and remain competitive in the global environment. If only investors would shed their home country bias and take notice.

Kind regards,

Jeff L. Yastine
Editor, Total Wealth Insider

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