Home Bias: Overholding Domestic Stocks
The Korean stock market is about 1.5% of the world's market capitalization. Yet many Korean investors have a domestic-stock weight of 50% or more. This is home bias.
What Is Home Bias
Home bias is the tendency of investors to hold their home-country stocks at a far higher weight than that country's share of the global market.
Global stock market capitalization weights (estimated as of 2024): - United States: about 60–65% - All of Europe: about 15% - Japan: about 6% - Korea: about 1.5%
If you invested in line with market-cap weights, Korean stocks would be 1.5% of your portfolio. Yet many Korean investors hold a domestic-stock weight far higher than this.
The Causes of Home Bias
Reasons home bias occurs:
1. Familiarity: companies like Samsung, Hyundai, and LG are familiar and their information is easy to access. 2. Language barrier: the inconvenience of having to access foreign-company information in English or other foreign languages. 3. Perceived FX risk: perceiving exchange-rate movements as an added risk when investing overseas. 4. Perceived tax differences: capital gains tax on foreign stocks vs. no tax on domestic stocks (for ordinary individuals). 5. National pride: optimistic belief in one's own country's economy and companies.
How Home Bias Affects Returns
The long-term return of Korea's KOSPI is low compared with the U.S. S&P 500.
A rough comparison for 2000–2023 (in KRW terms, excluding dividends): - KOSPI: about 3–5% per year - S&P 500 (converted to KRW): about 8–12% per year (varies with the FX effect)
When this gap accumulates, it leads to a substantial wealth difference after 20–30 years. Of course, there is no guarantee this relationship will continue in the future. However, diversifying globally allows other countries to offset the underperformance of a specific country's stock market.
Based on past data; it does not predict future returns.
よくある質問
Q. So should I not invest in domestic stocks at all?
The point is not to eliminate home bias entirely. A reasonable domestic-stock weight (say, 10–30%) has advantages in reducing FX risk, in tax benefits (for those who are not major shareholders), and in ease of information access. The problem is extreme domestic concentration of 50% or more. Using the global market-cap weight as a reference, distinguish between a weight you chose deliberately and one you hold out of inertia.
Q. Is U.S.-centric investing also home bias?
Since the U.S. market accounts for 60–65% of the world, some concentration in the U.S. is natural to a degree. But holding 100% U.S. stocks is a concentrated bet on the U.S. Whether the U.S. will keep leading the global market going forward is unknowable. If you want true diversification, a global index (for example, an ETF tracking MSCI ACWI) is more neutral.
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