We'd like to think that we're living in a global world with integrated financial markets. Investing in foreign securities has become easier more than ever. Yet, investors still suffer from what academics call the "home bias". The average investor's portfolio is heavily tilted, or biased, towards domestic assets.
There is an excellent video that features Kenneth French's views on the issue. He explains why home bias exists and why we should be diversifying internationally. We won't repeat his explanations here, you can watch the video, but we will emphasize one of his points. French notes that in 1980s US investors held about 2% of their portfolios on average outside the US, whereas in 2007 the corresponding figure was more than 25%. This suggests that home bias has actually been attenuated quite a bit over the last 30 years, and will probably continue to become less pronounced.
What we really wonder is whether the home bias will eventually disappear. 50 years from now, will investors hold a global market portfolio in which each country's weight is determined by the size of its market? We can see investors becoming more willing to invest in foreign securities as the world becomes a more global place. Yet, somehow, we are not convinced that an investor who lives in a country that makes up 5% of the global market portfolio would invest 95% of his funds outside his home country. As French points out in the video, investors feel more secure and confident when they invest in domestic securities. It seems home bias is here to stay at least for some more years to come.