Is the Price of Home Bias on the Rise for Equity Investors?

“The combination of rapid economic growth, young populations, and a massive catch-up in technology means that the corporate champions of tomorrow are being built in these regions today.”

—Van Agtmael, economist who coined the term ‘Emerging Markets’

As students of behavioral finance, we’re always thinking about how the natural foibles of human psychology might lead to mistakes when implementing investment strategies. After all, our brains weren’t optimized to navigate financial markets, but to maximize our chances of survival in a world of dangers that pre-dates Wall Street’s bubbles and crashes by many millennia! The premise of behavioral finance is simple: If only we could better understand how portfolio managers, advisors, and their clients think, the logic goes, it ought to be possible to avoid such ‘unforced errors’, build more robust portfolios, and thereby achieve much better investment outcomes. Along those lines, when it comes to asset allocation, perhaps the most impactful investment decision any advisor will make on behalf of clients, it seems that no behavioral anomaly is as pervasive as that of home bias: the tendency for investors to allocate disproportionately to their “home” market—for most reading this, that would be the United States—and forego equity opportunities abroad.

Some investors imagine that avoiding home bias requires underweighting U.S. stocks and overloading one’s portfolio with international equities. Happily, this is not the case. If an advisor were simply to invest by equity market cap, they would discover that almost two-thirds of their portfolio was allocated to U.S. stocks as a passive baseline. With a little research, they would find plenty of reasonable, data-driven weighting schemes that lead to even higher allocations to U.S. equities. Even so, we’ve run into plenty of advisors who take things to the other extreme, electing to hold only U.S. stocks, completely eschewing the broad set of investment opportunities—not to mention the simple diversification benefit—available in the world beyond America’s borders.

Such observations naturally lead to the question of how much home bias has historically cost advisors and their clients. Ironically, much to the chagrin of economists and institutional investors, most of whom regard under-diversification as a serious portfolio blunder to be avoided at all costs, one finds that for much of the last 15 years, home bias actually worked in investors’ favor—as long as they were American, that is—with U.S. stocks meaningfully outperforming those in markets across the rest of the world. An investment in the S&P 500 Index, for instance, returned almost 14% per annum from 2010 to 2024, while the truly global MSCI All Country World Index delivered just under 10%. That kind of performance differential naturally emboldened many investors to an even more entrenched distaste for stocks outside the United States. After all, shouldn’t we follow the data?

But of course, we all know that markets change, and the data keep coming. Along those lines, the last couple years have brought a much different dynamic to conversations about global equity performance. Take stocks in emerging markets, for example: a particularly unloved geography among the home-bias crowd. It might surprise some readers to learn that from the beginning of 2025 through June of this year, EM shares have rallied by 66.6%, more than twice the 29.9% return for the S&P 500 over the same stretch. Not surprisingly, such comparisons have recently led more advisors and their clients to take a closer look at what they might be missing in the absence of an allocation to EM.

The answer to that question, it turns out, is quite different today than it would have been even a few years ago. Way back in 2000, when U.S. tech stocks were hitting record highs, investors rightly thought of EM as a highly cyclical play on materials, energy, and cheap manufacturing for export to developed economies. But over the last decade, the profile of EM has changed considerably, with rapid earnings growth coming not just from those traditional exports, but also increasingly from expansion of developing countries’ domestic demand for everything from communication services and health care to fintech and clean energy technology. Such earnings, because they’re less tied to developed markets’ business cycles, should naturally be a more diversifying source of growth.

Even EM exports have taken on a different character in recent years, moving from low-quality manufacturing of low-cost goods—think t-shirts and plastic phone cases—to advanced technology at the heart of AI datacenters, the likes of which companies such as TSMC, Samsung Electronics, and SK Hynix can’t seem to manufacture fast enough. Indeed, as the chart above illustrates, the current AI wave has carried Taiwanese and Korean stocks’ footprint to expand from less than a quarter weight in the EM index before the pandemic to over half of the index today. Add in China, and East Asian benchmark weight has likewise gone from less than one-fourth of the EM index at the turn of the century to more than two-thirds of the portfolio’s weight today.

The upshot of all this is that it’s actually hard to imagine constructing a truly complete exposure to the global economy—or even just the AI theme, for that matter—without venturing beyond America’s borders. The good news for investors considering an allocation to EM in search of broader access to global technology is that the MSCI EM Index is full of it, with 45% weight to IT stocks as of the end of June: even more than the S&P 500’s weight to tech of just under 38%. And whereas the S&P traded at a forward P/E of 22x at the end of June, the MSCI EM Index sold for just 13x forward earnings. Given stats like these, we wouldn’t be surprised to see more advisors putting a higher priority on diversification, setting aside home bias, and taking a more confident step into international equities.

Disclosure: This material is for informational purposes only and should not be considered investment advice. An investor should consult with their financial professional before making any investment decisions. The opinions contained herein are subject to change without notice. Index data sourced from MSCI and S&P Dow Jones Indices as of June 30, 2026. Indices are unmanaged, cannot be invested in directly, and index returns do not reflect the deduction of any fees, expenses, or taxes. Past performance is not indicative of future results.