Home bias
Home bias is the tendency to hold a disproportionate share of a portfolio in domestic assets, far beyond what that country's weight in global markets would justify. It shows up as an oversized allocation to German stocks, German real estate, or euro-denominated savings relative to a globally diversified benchmark, driven by familiarity and information availability rather than a deliberate risk decision.
Why it matters
Home bias is a specific, common version of concentration risk: exposure concentrated by country instead of by company or sector. It matters because it often hides behind an otherwise sensible-looking portfolio — a Depot (brokerage account) holding twenty different German companies looks diversified on the surface, while every one of those companies shares exposure to the same currency, the same economy, and the same regulatory environment. Recognizing home bias is what turns diversification from a general principle into a check applied by geography, not just by number of holdings.
Immigrants building a portfolio in Germany face this from two directions at once — a pull toward German assets because they are now the familiar, locally visible ones, and residual home-country exposure carried over from before the move. Neither is irrational on its own; the risk is not noticing how much of the total sits in one country's economy.
Worked example
Comparing an actual allocation to a market-weighted one. Suppose Germany makes up an illustrative 3% of global stock market value, but an investor's €40,000 equity portfolio holds €16,000 in German companies — 40% of the total. That investor holds roughly 13 times Germany's market weight in domestic stocks, leaving the other 97% of the world's listed companies to share the remaining 60% of the portfolio.
| Allocation | German-stock share | Rest-of-world share |
|---|---|---|
| Illustrative global market weight | 3% | 97% |
| Investor's actual portfolio | 40% | 60% |
A German economic downturn that cuts domestic stock values by an illustrative 20% costs this investor 20% x €16,000 = €3,200. The same downturn, confined to Germany, would cost a portfolio held at market weight only 20% x 3% x €40,000 = €240 — because the rest of that portfolio sits in companies whose fortunes are not tied to the German economy. Neither allocation is automatically correct: a market-weighted portfolio adds currency and information trade-offs of its own, but the gap between 40% and 3% is the size of the bet being placed on one country, whether or not that bet was made on purpose.
Check yourself
An investor holds 35% of their equity portfolio in stocks from their home country, whose actual weight in global stock markets is about 4%. What does this gap best illustrate?
An investor's home country makes up an illustrative 3% of global stock market value. Their €50,000 equity portfolio holds €22,500 in home-country stocks (45% of the total). A downturn cuts home-country stock values by 25%. How many euros does the investor lose from that downturn, assuming the rest of the portfolio (companies outside the home country) is unaffected?
Which of the following are accurate statements about home bias? (Select all that apply.)