Home country bias could be dragging down the performance of retirement portfolios.
That's according to panelists at the FPA BE Baltimore 2016 Conference, who say many advisors and investors avoid taking a global outlook when choosing investments and stick to homegrown companies.
The aversion to international investments is largely due to fear of the unknown, Sarah Newcomb, a Morningstar behavioral economist, said on Wednesday.
“The national and international numbers tell us that most people, regardless of income and education levels, are largely financially illiterate,” Newcomb said. “It’s easy to see why they might be hesitant to invest in something that seems as exotic as an international fund.”
Many of the same fears that cause investors to flee to "safe" asset classes or sectors cause them to remain geographically concentrated in their portfolios, panelists said.
Yet international investing – especially in emerging markets – can juice portfolio performance and provide stability through greater diversification. Research Affliates recently predicted that the S&P 500 will return just 1.2 percent a year over the next decade, while foreign developed markets were forecast to return 6.3 percent a year, and emerging markets 8.1 percent a year.
Matt Hall, co-founder and president of Hill Investment Group in St. Louis, said that it is an advisor’s job to not just educate around the benefits of a global approach, but to push clients to embrace international funds.
“Where I come from, global capitalism is mandatory,” Hall said. “If you have a client that says I’m uncomfortable with international diversification, that discomfort is almost irrelevant. Diversification isn’t optional. ... My response isn’t how can we make you comfortable, it’s how can we create knowledge that ultimately leads to confidence and then to discipline.”
Most indexes contain large capitalization companies that already operate globally, noted Robert van Beek, founder and director of About Life & Finance, a Dutch financial planning firm.
“Our index in the Netherlands, if you look at the largest stocks, most of the companies are global companies that make their money globally,” van Beek said. “One of the largest, the Royal Dutch Oil Company, is a global company. The largest Dutch companies are making two-thirds of their profits in the U.S. How can an investor still think that they can’t invest in global companies?”