Comprehensive Guide
Learn more in our Investing Guide.
How it works
Home bias — overweighting domestic markets far beyond their world-capitalization share — feels prudent and behaves dangerously in exactly the scenarios that worry investors most. Domestic familiarity hides concentration: when a nation's market uniquely staggers (lost decades happen; Japan's 1989 peak took decades to revisit), a 70% home portfolio absorbs the brunt while a globally spread benchmark dilutes it. This stress test quantifies the asymmetry with YOUR numbers: apply an illustrative home-market decline and a milder elsewhere-decline to both your weighting and a chosen benchmark, then read the dollar gap between them. The loss ladder across weights 100% down to 40% makes the relationship mechanical — each ten points of home overweight shifts shock exposure measurably — and the post-shock weight calculation exposes passive concentration creep, since crashes mechanically RAISE the wounded market's share of what remains. Honesty requires symmetry: concentration amplifies home booms too, and the drops here are user-supplied illustrations rather than forecasts. Currency effects and multinational earnings overlap blur borders further. The tool sizes exposure so the decision — how much homeland is enough — becomes arithmetic instead of instinct.Formula
Loss = value × [home% × home drop + (1 − home%) × other drop] | Excess = your loss − benchmark-mix loss | Post-shock weight = surviving home ÷ surviving total
Tips
- Compare against world market-cap weights, not against zero — some home tilt is defensible.
- Remember multinationals blur borders: domestic indexes already hold global earnings.
- Crashes raise the fallen market's weight passively — rebalancing restores the plan.
- Currency-hedged international funds change the math; be consistent about which you hold.
- Run multiple stress severities — ordering of pain differs from any single scenario.
Frequently asked questions
What is home country bias in investing?
It is the tendency to hold far more domestic stock than global market weights suggest — American investors commonly run high US concentrations against roughly 40–60% world-share comparisons, and the pattern repeats in nearly every country. Familiarity, home optimism and inertia all feed it.
How much international diversification should I have?
Common anchors range from full market-cap weight — roughly 40–60% of a global equity portfolio depending on how you count — down to a 20–30% minimum for skeptics. The exact figure matters less than avoiding extreme concentration whose downside lands hardest in domestic-crisis scenarios.
Doesn't my home country market already give global exposure?
Partially — large domestic firms earn half or more of revenue abroad, softening pure geographic concentration. But listing currency, accounting and investor base still anchor home; in domestic crises those linkages correlate rather than protect, with cross-market correlations running high (0.7–0.9 illustrative) even so.
What happens to a concentrated portfolio if the home market crashes?
Outsized losses plus passive creep: a 70% home weight suffering 35% while world markets fall 22% loses roughly 31% overall and finds home share RISEN toward 74% afterward. Rebalancing then sells safer assets to buy the wounded home market — disciplined but uncomfortable.
Is concentrating at home ever justified?
Arguments exist — no currency mismatch, no foreign withholding friction, easier behavior holding familiar names. The honest framing is cost: you knowingly accept larger home-crisis drawdowns, like the 35%-versus-22% shock here, in exchange for simplicity. Price that premium explicitly before accepting it.