When buying local leads us astray

When it comes to personal purchases, we tend to prefer buying local products. I find myself checking the label of products to see where the product originated. Most often, if it's from Switzerland or made in Switzerland, I am more inclined to make the purchase. Some people obviously buy local for social, economic and ecological reasons, but many consumers buy local because they have a higher familiarity with local products and hence believe it to be superior.

This is also a very common behavior in investing. There's a natural tendency for investors to "buy local" or invest predominantly in "local favorites" companies. The proper term from this?bias is home country bias.

One of the main reasons for this bias is informational asymmetry. Investors are likely to know more about their local enterprises than about foreign investments and therefore tend to overweight their exposure to local stocks. The unconscious bias in this behavior is that by overweighting local investments, the investor basically acts as if the local market has a better economic outlook than foreign markets. This might be true at some time, but most certainly not all the time.

Investors unaware of this unconscious bias might end up with unbalanced portfolios. And they are ignoring the first rule of investing – diversification. By spreading investments out across geographical regions (as well as across asset classes and sectors), investors can compensate for the volatility in a single economic region and reduce the overall risk of their portfolio.

Be a local fan, but don't put all your money on one team.