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?”

The panelists agreed that it seems like many advisors and investors are trying to follow Peter Lynch’s recommendation to “invest in what you know,” which exacerbates the home country bias.

Newcomb argued that there are deep behavioral tendencies that cause people to recoil from international opportunities. Human beings become more resistant to dedicating resources to an investment the farther away an investment feels, a concept called psychological distance, she said.

While physical distance measures the mileage between two objects, psychological distance measures how far away something feels, and it’s made up of four dimensions: physical distance; time; social distance (whether is it happening to something the person is close to); and hypothetical distance (whether it’s something guaranteed versus a remote possibility), she said.

“Whenever we’re making tradeoffs in our mind, we’re making decisions based on a mental model of a scenario, and it’s subject to psychological distance,” Newcomb said. “I care more about something if it’s happening here, now and to me, and if I feel like it’s something that’s guaranteed to happen. When you have something close or distant on one dimension of psychological distance, it feels closer or more distant on the others."

This impacts people's view of companies that are based far away, she said. "it’s going to feel more risky even though you have no less control in that scenario than you do if you hold a U.S. company. It’s adding a perceived risk that people will avoid.”

Newcomb said that advisors, despite their higher levels of financial literacy, are just as prone to home bias as the rest of the investing public.

Psychological distance also exposes investors to concentration risk, said van Beek.

“We have had a lot of clients working for big U.S. companies who were paid very well, and partially in stock options,” van Beek said. “When we talked to those clients about investments, they asked us to invest their extra money back into their companies. Besides their stock options, they wanted to put 25 percent of their personal savings into the same company. That’s where the advisor needs to come back and talk about diversification.”

Yet behind every decision is a narrative that an investor or advisor tells themselves, said Newcomb—when markets go down, for example, people tell themselves that their nest egg is in trouble. Or millennials who are having trouble saving enough to invest tell themselves that the financial industry is corrupt. To manage investor fears, advisors have to manage the financial stories that clients tell themselves, the panelists said.

Hall argued that the media’s market coverage, also prone to home bias, shapes many people's narratives.

“Who can blame a normal human when they’re riding in the car to and from work and the radio hosts aren’t talking about global markets, they’re talking about the Dow and the S&P,” Hall said. “In market conversations, the context is more often than not U.S. large caps.”

Ironically, in an era where economies and people are more globally connected than ever before, home country bias remains intransigent.

“We talk about a global economy, but we don’t invest as if we were citizens of the world,” Newcomb said.