Origin bias is when investors focus on domestic securities despite foreign investments being more lucrative. This bias can be due to difficulties in buying foreign securities, legal restrictions, or a sense of national pride. Diversification with foreign investments can protect against negative impacts on domestic holdings.
Origin bias is a term used to describe the inclination of investors to focus their investment activity on securities that are primarily domestic in nature, even if investing in foreign securities appears to be a more lucrative approach. There are several reasons why an investor may exhibit such a bias, including actual or perceived difficulties in buying and selling foreign securities, additional transaction costs associated with executing orders involving foreign investments, and sociological factors that promote the concept of support the national production of goods and services.
One of the common misperceptions that leads to housing bias is the idea that a portfolio carries less risk if all the assets held are domestic. That is not always the case. Depending on the current state of the economy within a given nation, there is a chance that foreign investments carry a lower rate of volatility, while offering the same level of return as a domestic counterpart. Assuming that the foreign investment is not likely to be adversely affected by events currently taking place in the domestic market, the investor may find that the return is even higher with the foreign asset.
Another reason for the bias at home has to do with legal restrictions and the possibility of higher transaction costs that may be involved with buying and selling foreign securities. In some situations, there may be regulations that limit or even prohibit an investor from purchasing securities issued in another nation. When that is the case, investors can search for investment opportunities in other countries, determine whether such restrictions exist, and then compare the potential return with that of similar domestic investments. As for additional transaction fees, there may or may not be more expenses involved. Determining in advance what those charges would be can help the investor determine whether these are additional expenses and whether the increased transaction cost is offset by the anticipated gains from the acquisition of the asset.
Home bias may also be related to a sense of national pride. In this scenario, an investor feels obligated to support his nation’s economy by purchasing securities issued by companies based in the country and operating primarily within the home nation. While laudable, this strategy does not necessarily benefit the national economy as effectively as including some international investments in the portfolio. This is especially true if those foreign interests do business in the home nation, offering employment opportunities and selling goods and services.
Many financial professionals recommend diversification when creating and maintaining an efficient investment portfolio. Part of that process includes consideration of foreign and domestic investments, a move that helps minimize the influence of home bias. Doing so provides a measure of protection against any event that negatively impacts domestic holdings by offsetting losses with gains earned from foreign investments.
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