Home Bias in US investing
Hi, I’m Viram from Vested and today’s topic is home bias.
Today’s video we’ll also cover an exciting new tool that we’ve launched invested which allows you to see what others from india are investing in
in the U.S markets.
What is home bias
So to start off let’s talk about what home bias actually is?
Home bias is the phenomenon in which an investor prefers the domestic markets over the foreign markets and that leads to a portfolio that actually performs worse than it should. For us to understand why homebias is bad for a portfolio, let’s look at what’s the primary goal of an investor.
The primary goal of an investor is to minimize the risk they take to maximize the returns that they can earn right and so the way to minimize risk is basically to diversify your portfolio across different assets that don’t move
in tandem with each other. Now when you suffer from home bias you
invest your entire portfolio in one particular market which is the domestic
market. But what you’re losing out on is the opportunity to spread your investments globally across different countries, currencies and markets.
What global investments allows you to do is it allows you to reduce the amount of risk in your portfolio while maximizing your returns.
So next let’s look at why we suffer from home bias?
This question has puzzled many in today’s globalized world one would imagine that investors are naturally thinking globally but this home bias issue is not just an issue in India, but across the world. Investors have always preferred domestic markets versus foreign markets.
Reasons for home bias
Here are three main reasons why:
The first is a feeling of familiarity with the domestic markets. We believe that we do not have enough information on the foreign companies as we do for
The second reason is the belief that transaction costs for international investing are higher than for domestic investing.
The third reason that supports home bias is the fact that we have foreign
exchange risk when investing internationally.
Because when we are investing in the global markets you have to convert currency into another currency one feels like they have to time the currency markets or need to know forex trading to be able to invest internationally.
In today’s technology and information age, all of these three reasons are nothing but excuses. For us to find any information on the international companies, it’s now just a few clicks away because of the internet.
Agreed that transaction costs for international investing were higher earlier,
but now because of the API’s asian of financial services gone are the days of requiring hundred thousand dollars in minimum deposit and five dollars commission per trade.
You can easily start investing internationally without any minimum requirements or without even having to pay any commission.
The last reason that we talked about foreign exchange risk is a valid one
but the way one should look at it is that it is a hedge against their predominantly Indian rupee portfolio when they are investing in an international currency.
In addition to that, if the rupee continues to behave the way it has against the dollar over the last decade one can make additional returns from this foreign exchange risk and make up to about 4% per year as the rupee depreciates against the dollar.
What is actually exciting is that over the last few months, thousands of Indians have actually realized their home bias in their portfolios have gone and diversified their portfolios internationally.
They have done that either through mutual fund routes like investing in
portfolios of the Nasdaq 100 or funds of funds that are allowing global exposure or they’ve gone and directly opened a brokerage account and started investing in the U.S markets.
There really is no right or wrong option. It depends on your choice as an investor which option you prefer, both of them have their pros or cons. But as somebody that’s working on simplifying direct U.S investing for Indians, I can say with conviction that investors that prefer having control over their portfolios and want to take advantage of the diverse opportunities available in the international markets, These investors tend to prefer direct U.S investing.
So, let’s say you want to start your direct investing journey. You might be wondering what are the most popular stocks among Indian investors? To be able to show you that we launched this new tool called vested trends which clearly shows across different time periods what’s trending on the vested platform in terms of stocks and ETFs and also how investors in India had adjusted their holdings in U.S stocks and ETFs over time.
So, for example, Tesla has been one of the most popular stocks on Vested all throughout 2020. And even if you go today you’ll see on western trends how Tesla shows up as the number one popular stock very often. Along with that companies like Amazon, Apple and Microsoft are also super popular. Nowadays with cryptocurrency standing, Coinbase has also been in popular demand on the vested platform.
All right to sum it up,today we talked about how home bias can be detrimental to your portfolio and how you can see what others in India are investing into via western trends.