Rules of the Game: The Home Field Disadvantage

 | Jul 30, 2014 | 12:30 PM EDT
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Like it or not, most of us are comfortable in our own environments. I'm not saying you don't like to travel or try out new restaurants, but, as a group, most of us have a distinct comfort zone.

When prospects and clients come to our office, we talk to them about "home bias." Most American investors gravitate toward domestic stocks. That's a natural decision. We're surrounded by American companies. On my drive to the office, I pass McDonald's (MCD), Whole Foods (WFM), Starbucks (SBUX), Michaels Stores (MIK), Dunkin Donuts (DNKN), Natural Grocers (NGVC), Allstate (ALL), Sherwin Williams (SHW) -- well, I think you get my drift.

These companies are what we know. It makes sense that we want to buy their stocks. It's not likely that it would occur to us to buy German or Japanese small-caps. And even if it did, it wouldn't be easy to get those stocks, or even get information about them.

As usual, I'm going to put some blame with the media. If you watch a financial TV channel or read one of those magazines with investing advice, you'll get a lot of information about so-called "blue chips." Well known American companies, just like the ones I pass every day. The same ones you're familiar with, too.

You can be forgiven for thinking these are your only investment options. But we aren't told some facts, such as this: Over a 25-year time frame, international value stocks beat international growth 100% of the time. Over that same period, international small-caps outperformed international large-cap 100% of the time.

Domestically, value outperforms growth, and small-caps trump large-caps over longer time frames, too. I'm just sharing this data to make a point: You won't hear much about the performance of non-U.S. stocks.

I recently came upon a fun little article that makes the point about home bias. Author Phil Wright of Jackson National Life Insurance uses the example of fantasy sports teams to show another case of home bias.

He writes, "One of the mistakes that Fantasy Footballers make, including myself, is to draft players from their favorite teams, rather than selecting better players from other teams. Let's call it the 'Homer Effect.'" Wright goes on to discuss "home field disadvantage," the result of keeping boundaries too narrow when choosing a team. The same is true for investments.

People who were only invested in U.S. large-caps suffered the famous "lost decade" between 2000 and 2009. Those who diversified -- even into domestic small-caps, real estate investment trusts (REITs) and fixed income -- enjoyed returns even while the S&P 500 continued to lag.

That concept really brings home the point about the need to diversify beyond our comfort zones. But one caveat: Don't try to pick overseas stocks that are hard to research, and even harder to buy. Find an index of international stocks, or even an active fund with a relatively low expense ratio. Add that to your asset mix.



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