Home bias: the preference for your home market and what it costs

Basics8 min read · updated 7 October 2026 · 7 sources

Home bias is the tendency of investors to hold far more shares from their own country than its share of the global stock market would justify. German investors like to bet on the DAX, Americans on US stocks, Japanese investors on Japanese companies. Home feels familiar and safe. In reality, though, the lack of diversification costs you risk without any reward in return. This article shows how large the effect is, where it comes from and when a certain home advantage can make sense after all.

What home bias means

An investor without preferences would hold equities according to their share of the world market: a lot of USA, some Japan, UK and Europe, and a slice of emerging markets. Germany makes up only a small part of that. If, on the other hand, you put half or more of your money into German shares, you have a pronounced home bias. The same applies on a smaller scale if you mainly buy shares in your own employer or from your own region.

French and Poterba (1991) showed how widespread this is as early as the early 1990s: Japanese investors held more than 98% of their equity wealth at home, US investors 94% and British investors 82%. According to their model, these investors would have had to expect their home market to return several percentage points a year more than foreign markets; otherwise the allocation makes no sense. Their conclusion: the low diversification is a choice made by investors, not the result of restrictions.

What a lack of diversification costs

The markets of different countries do not move in lockstep. The lower the correlation between two markets, the more volatility falls when you combine them. Solnik (1974) showed this early on: the risk of an equity portfolio falls much more when you add foreign shares than when you simply buy more domestic stocks.

On top of that comes the concentration risk of a single country. A national index consists of a few dozen large companies and is often concentrated in a handful of sectors. Economic policy mistakes, a banking crisis or the decline of a key industry hit the entire market. Diversified worldwide, this risk is spread across many economies. Long data series also show that individual countries can lag far behind the world market for decades.

A look at long periods

Japan shows how long a single country's dry spell can last: the Nikkei 225 benchmark index only regained its peak from the end of 1989 in 2024. A Japanese investor with a strong home bias would have seen hardly any price gains for more than three decades while other markets rose. Dividends softened this somewhat, but do not fundamentally change the picture. No country is immune to this, Germany included.

Measuring home bias in your own portfolio

You can easily estimate whether you have a home bias yourself: add up the Germany share of all your funds, each weighted by its share of your portfolio. A world ETF holds Germany at its small share of the world market; a DAX ETF consists entirely of German shares.

This is exactly the kind of overlap that the look-through in Portfolio Lab makes visible. Whether you really want an overweight then becomes an informed decision rather than an accident.

Why investors still invest at home

Research has gathered many explanations; Lewis (1999) provides an overview. None explains the extent on its own, but together they form a picture:

• Familiarity: well-known brands and companies feel safer. But familiarity is not a measure of risk.
• Information advantage (or the illusion of one): Coval and Moskowitz (1999) found that even within the USA, fund managers prefer companies from their own region, especially small firms. They suspect unevenly distributed information as the cause. For private investors, a genuine edge is rare.
• Costs and taxes: foreign shares used to be more expensive to trade and harder to get hold of; withholding taxes on dividends still play a role today. Broad ETFs have largely removed these hurdles.
• Currency: your spending is in euros; foreign shares bring exchange rate risk with them (see currency risk).
• Behaviour: optimism about your own economy and a sense of being in control reinforce the tendency.

For advanced readers: what the allocation reveals about expectations

The approach of French and Poterba can be turned around: from an observed allocation, you can calculate which expected returns would justify it. This is the same idea as the reverse optimisation in the Black-Litterman model, in which the implied equilibrium returns follow from market weights. To justify the strong home bias, investors would have to expect their home market to return several percentage points a year more than foreign markets. Nothing supports this expectation, and investors in every country would have to hold it at the same time. That alone shows that this is a bias rather than a well-founded forecast.

When a home tilt can make sense

Looking to your home market is not entirely wrong. For bonds and safe assets, a strong home tilt even makes sense: if you live and spend in euros, you should keep your safe money in euros. For bond portfolios, Campbell et al. (2010) conclude that almost full currency hedging minimises risk. For equities, a slight overweight of the euro area can reduce exchange rate risk. It becomes a problem when a single country makes up a large part of your equity holdings.

Human capital also matters: your income already depends on the domestic economy, often on one particular industry. If that industry suffers, your job and your portfolio are hit at the same time. From this point of view, there is a strong case for holding fewer domestic shares in your portfolio rather than more, and particularly few shares in your own employer.

Home bias beyond the portfolio

The home tilt does not stop at equities. Many households own a property where they live, have their retirement savings with domestic insurers and earn their income from a domestic employer. Their entire wealth then depends heavily on one region and one currency. A globally diversified equity portfolio partly offsets this concentration. That is one more reason not to bet additionally on the home market there.

The reverse problem: the US share in a world ETF

Buying a world ETF instead of the DAX does not get rid of country risk entirely. Indices are weighted by market capitalisation, and the USA dominates: according to MSCI World Factsheet (2026), its share of the MSCI World was 72.94% at the end of September 2026, and according to MSCI ACWI Factsheet (2026), 64.21% of the MSCI ACWI, which includes emerging markets. A world ETF is therefore diversified in line with the market, but heavily dependent on one country. Whether to offset this with additional holdings is a deliberate decision. More on this in the article World portfolio.

Any deviation from the world market is always an active bet. That applies to overweighting Germany just as much as to underweighting the USA.

How Portfolio Lab calculates

In the Look-through, Portfolio Lab breaks funds down by country, region and sector based on their holdings lists. This shows you how much Germany, Europe, the USA and emerging markets your portfolio really contains, even when several ETFs overlap. Under Assets you can calculate the correlations between country ETFs, and in the Backtest you can compare a DAX-heavy portfolio directly with global diversification over the same period. How the country mapping works is described in the look-through methodology.

This article explains a method; it is not investment or tax advice. Worked examples are simplified and rounded. All terms in the glossary.