US-based investors may believe they know the United States best. Accordingly, they are liable to put the bulk of their investments in stocks and bonds of US-based companies and in US federal and municipal fixed income securities. Given the size and relative safety of this market, that may seem a sound approach. Yet this strategy has some holes. “Home bias” can limit your investment opportunities and constrain your ability to benefit from global diversification.1
Consider these revealing numbers:
- The US stock market is the biggest in the world, but stocks of the roughly 18,200 companies trading outside the US represent 35% of the world’s $94 trillion equity market (see Exhibit 1).2
Exhibit 1: Wealth of Nations
Percentage of world equity market capitalization as of December 31, 2024
The investment-grade bonds in the Bloomberg Global Aggregate Bond Index are valued at $67 trillion—and most of this debt is issued outside the US (see Exhibit 2) and in currencies other than the US dollar.
Exhibit 2: Foreign Legion
Percentage of world investment-grade bond market as of December 31, 2024
Global Ups and Downs
When Americans invest outside the US, they can capture equity returns from thousands of companies around the globe and potentially offset weak performance in one market with stronger returns elsewhere. Returns in 2022 offer a useful example of this phenomenon: The US stock market tumbled 19.8%, but non-US developed markets like the UK (–4.8%) and Hong Kong (–4.7%) performed much better. 3 And, in two examples from emerging markets, Turkey soared 90.4% and Chile gained 19.4%. Similarly, in fixed income markets, both yields and total returns typically vary across the globe and often do not move in lockstep, which is no surprise. Bonds issued in different countries and currencies can offer a range of yields and expected returns.
The Paradox of Size
A country’s size, population, or gross domestic product doesn’t necessarily tell us much about the investment opportunities in that country. Japan, for instance, is relatively small in landmass but accounts for 5% of the world’s equity market value—representing over 2,400 companies, including familiar names like Toyota and Sony—as well as 10% of the investment-grade bond market. Even a tiny country like Switzerland is home to publicly traded giants like Nestlé and two of the world’s biggest pharmaceutical firms.
By looking outside their home market, investors can expand their choices and opportunities for higher expected returns. A global approach can also enhance diversification, which may help reduce portfolio risk and volatility. This isn’t guaranteed to produce strong returns every year, but it can deliver more reliable outcomes over time, helping investors stay on track toward achieving their long-term goals.
Footnotes
1. For more information on home bias, see the following: “Home Bias,” Corporate Finance Institute, September 18, 2020; Eduard Gaar, David Scherer, and Dirk Schiereck, “The Home Bias and the Local Bias: A Survey,” Management Review Quarterly 72 (November 2020): 21–57; and “The Randomness of Global Stock Returns,” Dimensional Fund Advisors, June 2019.
2. Based on the free float-adjusted market capitalization.
3. MSCI country index performance, year to date as of December 31, 2023. MSCI data © MSCI 2025, all rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
Exhibit 1: In USD. Market cap data is free-float adjusted and meets minimum liquidity and listing requirements. Dimensional makes case-by-case determinations about the suitability of investing in each emerging market, making considerations that include local market accessibility, government stability, and property rights before making investments. China A-shares that are available for foreign investors through the Hong Kong Stock Connect program are included in China. 30% foreign ownership limit and 25% inclusion factor are applied to China A-shares. Many nations not displayed. Totals may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. Bloomberg data provided by Bloomberg. Diversification neither assures a profit nor guarantees against loss in a declining market.
Exhibit 2: In USD. Data is from Bloomberg Global Aggregate Bond Index. The index excludes noninvestment-grade securities, bonds with less than one year to maturity, tax-exempt municipal securities, linked bonds, and floating-rate issues. The treasury sector includes both nominal and inflation-linked native currency debt issued by central governments, which are backed by the full faith and credit of a central government. Government-related sector groups are issuers with government affiliations, including agencies, sovereigns, supranationals, and local authorities. The corporate sector categorizes issuers based on primary lines of business, revenue streams, and operations used to service debt and includes industrials, financial institutions, and utilities. The securitized sector is designed to capture fixed income instruments whose payments are backed or directly derived from a pool of assets protected or ring-fenced from the credit of a particular issuer (either by a bankruptcy remote special purpose vehicle or bond covenant). Underlying collateral for securitized bonds can include residential mortgages, commercial mortgages, public-sector loans, auto loans, or credit card payments. Many nations are not displayed. Totals may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. Bloomberg data provided by Bloomberg. Diversification neither assures a profit nor guarantees against loss in a declining market.
Disclosures
This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security.
Past performance is not a guarantee of future results. Diversification neither assures a profit nor guarantees against loss in a declining market.
