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Avoid this mistake about global diversification

Don’t get stuck in your own backyard. Investors should consider building globally diversified equity portfolios that avoid the persistent and worldwide phenomenon of home-country bias. That’s when you allocate a greater weight to your home-country stocks than their percentage of total global market capitalization.

Among the reasons investors around the world exhibit this bias is that they confuse the familiar with the safe. Unfortunately, Lake Wobegon — home of the perennially above-average — exists only in fiction. It cannot be that every developed country is safer than the others.

Compounding the problem is that investors tend to believe not only that their home country is a safer place to invest, but also that their home country will produce higher returns. This belief defies the basic financial concept that risk and expected return are related.

Read the rest of the article on CBS News.

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