Portfolio allocation can sometimes resemble the pride that one may hold for their favorite sports team, rooting for an investment in an allocation to appreciate as though the investor is cheering for their team to win a game. The same can be said from a geographic allocation standpoint. Investors tend to lean towards their country of domicile for a handful of reasons including familiarity- particularly in subscribing to the adage “knowing what you own”. A balance must be met with respect to the concept of investing in what one is most familiar with, and the drawbacks in the form of home country bias that can arise when this thesis is taken too far. Continual oversight is the responsibility of the investor and/or advisor to be allocation-agnostic in an ongoing attempt to achieve a portfolio best positioned for growth and principal protection.

This practice requires discipline, considering baked-in biases and the fact that when many pundits refer to “the market”, they are commonly referring to the S&P 500, Dow or NASDAQ. The United States’ outperformance in the 2010s presented a case to nudge US investors to overweight domestic equities. A look into GDP factors reveal catalysts that support outperformance, e.g., ten percent of GDP in the US is attributed to technology, with the tech industry's gross domestic product increasing “66% between 2010 and 2019, adding $745.5 billion in output”. [1]

Shifting focus to the Canadian economy as an example, 10% of their GDP can be attributed to energy, due to the significance of oil production and export. This does not solely affect the energy industry in Canada. “In 2019, Canada’s energy sector directly employed more than 282,000 people and indirectly supported over 550,500 jobs.”
[2] With a vast share of overall individuals employed in the industry either directly or indirectly, the oil industry has a high likelihood for knock-on effects to other sectors within Canada as a whole. All of this is to say that an investor, even with a diversified portfolio of domestic companies in a variety of sectors, may still be exposed to lopsided risks due the residual effects how a given country’s largest GDP sectors fare at a given time.

The United States’ outperformance in the 2010s is mirrored by the “lost decade” in the US stock market between 2000 and 2010, where the S&P 500 returned 1.4%, versus International Developed Market Stocks (MSCI EAFE Index) returning 3.5%, and Emerging Markets (MSCI Emerging Markets Index) returning 15.9% over the same period. [3] Of course, past performance is not a guarantee of future results, but a diversified portfolio incorporating global allocation in both of these periods introduces potential for upside capture in one geography as a cushion to another lagging geography.

The aforementioned discipline with respect to pursuing knowledge of other markets apart from one’s own to form a strategic allocation is extended to exercising buy and sell discipline once a portfolio is deployed. The practice of embracing a portfolio of uncorrelated investments is a discipline in itself - if all of the investments in a given portfolio are appreciating in lockstep, it may seem as though the portfolio has been optimized, when in reality the correlation coefficient of the investments in the portfolio may expose the investor to a similar deterioration of gains should the market turn.

Avoiding home country bias, being allocation-agnostic, and embracing diversification are not insurance policies against loss. As author Morgan Housel describes, “If markets never crashed, they wouldn’t be risky. If they weren’t risky, they would get really expensive. When they’re really expensive, they crash.” [4] This concept is preeminent in investing and within the thesis of diversifying not only sectors within an allocation, but also geographies. Housel continues, “one of the hardest things an investor can do is maintain conviction on a long-term strategy when there’s a changing of the guard between one game and the next.” Maintaining conviction, staying the course under continuous portfolio oversight presents higher likelihood for success in the long run - and a bona fide aspect of diversification is exposure to multiple geographies, recognizing the potential to skew towards home country bias with respect to overall percentage allocation.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often neutered for investments in emerging markets. Asset allocation does not ensure a profit or protect against a loss.
Investing in mutual funds involves risk, including possible loss of principal. Find value will fluctuate with market conditions and it may not achieve its investment objective.

Stock investing includes risks, including fluctuating prices and loss of principal.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect principal.

The Financial Consultants at Vintage Wealth Advisors are registered representatives with, and securities offered through, LPL Financial, Member FINRA/SIPC. Investment advice and financial planning offered through Financial Advocates Investment Management, DBA Vintage Wealth Advisors, a registered investment advisor. Financial Advocates Investment Management, Vintage Wealth Advisors, and LPL Financial are separate entities.

1) PR Newswire-Tech Employment Surpasses 12 Million Workers
2) Government of Canada-Energy and the Economy-Data & Analysis
3) Schwab-the Long Term Benefits of Global Diversification
4) CollaborativeFund-The Reasonable Formation of Unreasonable Things