Why patriotism is dangerous in investing

Home-country bias is global

Most people love their own country. I do too! But, like all emotions, patriotism is dangerous in investing. Too many people let home-country love and familiarity bleed into investment decisions - a dangerous cocktail known as home-country bias. In investing, set aside your patriotic passion. Invest globally, not locally, to diversify and reduce risk.

No investor is fully immune from home-country bias. Wherever my firm talks to investors, we encounter it - Belgium, Denmark, Canada, Germany, even Britain and America.

For some of these, the risks are obvious. Owning the MSCI Belgium Index would mean putting over 57% of your portfolio in one company, Anheuser-Busch InBev. Owning the MSCI Denmark would put nearly half your portfolio in Novo Nordisk. Both are huge, obvious risks, no matter how great you think these companies are. Investing abroad is the only way to avoid huge concentrations in one company or sector.

But the logic of diversification doesn't end if you're in a larger, broader economy. Canada has the world's 10th-largest economy, but its stockmarket is concentrated in just three sectors - Financials (41.4%), Energy (21.3%) and Materials (11.5%).

Hence, for Canadians, home-country bias means overexposure to banks and natural resources. Since the commodity downturn began nearly two years ago, that has been a losing proposition.

UK has weak spots too

Owning only UK stocks also introduces risky sector positioning. Over half your portfolio would be in three sectors - Financials, Consumer Staples, Energy - and almost none in Technology.

Tech represents just 1.7% of the MSCI UK Index, versus 14% of the MSCI World, and none of the world's biggest tech firms are British. A huge blind spot with astronomical opportunity cost when tech outperforms.

Then, too, big as the UK and others are economically, they are fractions of the global stockmarket. UK stocks are just 7.3% of the MSCI World. If you don't invest globally, you ignore over 90% of the world. Think of the missed opportunities!

For Canadians and Germans, it's even more striking. Canada is just 3.5% of the MSCI World. Germany, the world's fourth-biggest economy, is just 3.3% of the MSCI World.

America is about 60% of the MSCI World, but home-country bias is no less dangerous for yanks. Owning only US stocks means excluding 40% of the developed world and all the opportunities therein. Why ever take that risk? Why ignore opportunities to capitalize on growth in Europe and Asia? Why over-expose yourself to one country's political and regulatory risks?

Own the world

Owning the world is your hedge against today's big fears, real or misperceived. Worried about Brexit's impact on the UK? Invest globally! Worried about slow growth in the eurozone? Invest globally! Worried about natural resources in Canada or Australia? Invest globally! Worried about Japan's long malaise? Invest globally! Worried about Tweedledee or Tweedledum becoming America's next president? Invest globally!

If you own the world, you aren't over-exposed to any one risk. Service-heavy economies help balance out the big commodity players. Countries with political gridlock offset those with active lawmakers. In 2010 and 2011, America's stability mitigated the euro crisis.

All well-constructed benchmarks tend to perform similarly over the very long term, but they can vary wildly over short periods. The broader your benchmark, the more each country's wild swings offset each other, cutting short-term volatility and giving you a smoother ride.

That, in turn, reduces the temptation to flip in and out as stocks jump and dip, lowering your error rate and capturing more of stocks' long-term returns for you. It might feel less patriotic, but it's the ticket to long-term success. So start now, with these two non-UK stock picks:

America's Cognizant Technology Solutions is now a mainstream IT consulting-and-services firm, primarily in application development. It competes with bigger brethren like Accenture and IBM, taking share and growing by profitably underpricing via cost advantages, with roughly 70% of staff in India. The cost differential and steady growth justify my 2016 estimated price/earningsgs multiple of 19.

For a European stock, buy Germany's Fresenius SE, my best single slice of non-US diversified healthcare - spanning services, supplies, equipment, generic drugs and hospitals in roughly 100 countries (and it owns 31% of Fresenius Medical Care). Growing, globally diversified, well-managed - it's an adjunct to your big pharma stocks - at 20 times my 2016 earnings estimate. It's one counter-strategy piece as we head into the six months before America's election, a time when US stocks should lead.

Ken Fisher is founder and chief executive of Fisher Investments.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.