Alumni Profiles

At a time when stock markets around the world are getting hammered by the Asian flu and the ruble's collapse, U.S. investors may need little persuasion to stay away from investing in foreign stocks. Interestingly, though, even when international stock markets are less troubled than they are now, investors still prefer to buy more stocks at home than abroad. In the process, they sacrifice potential gains they might have received by having an internationally diversified portfolio. Researchers call this phenomenon the "equity home bias."

What is the effect of this trend on investors' stock portfolios? Finance professor Karen Lewis, who has conducted substantial research on these issues, notes in a recent study that investors do not do a good job of hedging their investment risks across countries. Domestic and foreign stock markets do not move perfectly together, she says, which means that there is diversification potential for investing in foreign stocks. "Risk can be reduced, in the long term, by adding foreign stocks to your portfolio," Lewis states. "For investors who hold no foreign stocks, increasing their holdings of foreign stocks somewhat can reduce their overall risk."

Karen K. Lewis: Explaining Home Bias in Equities and Consumption