• Investors in developed countries tend to have a home bias, allocating more money to their domestic market than its global representation. 
  • A home bias can lead to increased return volatility and missed opportunities in better-performing regions, making global diversification important for long-term investors. 
  • A global market cap-weighted approach is recommended to efficiently capture market returns and minimise portfolio volatility across regions.

For one reason or another, equity investors across most developed economies tend to allocate more to their domestic markets relative to that market’s weighting in global benchmarks1. In Europe, our research found investors’ allocation to domestic stocks ranged from seven- to 30-times larger than the relevant country’s weight in the MSCI All Country Investable World Market Index2.

This bias towards home markets—often called a ‘home bias’—might be the result of a number of reasons, such as inertia, a fear of the unknown or a legacy from when global financial markets were less accessible to retail investors. For some clients, a home bias is a conscious decision. For example, research has found that investors tend to be more optimistic about the prospects of their domestic economies than foreign investors are, which can influence allocation decisions3. In some cases, investors might favour domestic markets to reduce exposure to foreign currency exchange risks. 

Home market volatility

Whether intentional or not, it’s important that investors are fully aware of the possible implications of maintaining a home bias in their portfolio. Tilting investments towards a single market can increase return volatility, which is best demonstrated in the chart below that shows the volatility of global stocks compared with individual country indices over a 50-year period.

Volatility of returns by market

A bar chart showing average volatility of regional equity markets compared to the global equity market. The global equity market has the smallest bar.

Past performance is not a reliable indicator of future results. 

Sources: Vanguard calculations, based on data from FactSet, Morningstar and MSCI Notes: Data are as at 30 September 2020, for the period from 1 January 1970 to 30 September 2020. Country returns are represented by MSCI country indexes; the global market return includes both developed and emerging markets. Emerging markets are represented by the MSCI Emerging Markets Index, which began on 1 January 1988. The euro area is represented by the MSCI Europe ex-UK ex-Switzerland Index from 1 January 1970 to 31 December 1987, and the MSCI EMU Index thereafter.

As can be seen, domestic and regional markets come with greater return volatility than the global equities market as a whole. That’s why broad diversification across global markets makes sense for many long-term equity investors who want to minimise the volatility of their annual returns.

Another risk with overweighting client portfolios to domestic markets—or any other market—is that other regions might perform better over any given period. Adjusting a portfolio’s exposures to global markets based on which regions, sectors or individual securities are expected to outperform is notoriously difficult over the long-term. Global diversification enables investment portfolios to capture returns from whichever regional market is outperforming at any given time.

Sizing your allocation

The decision to invest globally is only the first step. The next step is to determine an appropriate allocation across regional markets. The standard asset-allocation approach, at both the global and local market levels, is to invest proportionally according to market capitalisation (market cap). In practice, that means spreading investments across all investable securities according to their relative representation in the universe, with more allocated to larger markets and to the larger companies within those markets relative to smaller markets and firms. 

At Vanguard, we believe a global market cap-weighted approach is the most efficient way to achieve market returns via diversified exposures at low cost. As the global economy evolves, some markets will grow relative to others and a global market cap-weighted approach will reflect such changes within an investor’s portfolio.

Because some markets are more correlated than others, the ideal allocation to international equities (based on minimising portfolio volatility) depends on the investor’s home market and its relationship with global markets. Previous Vanguard research analysed portfolio volatility after incrementally adding global equities to a 100% domestic equity portfolio for various regions, based on 10-year asset class return forecasts (calibrated in 2020).

For euro area investors, expected portfolio volatility declined the higher the allocation to global markets for both a 100% stock and a 60/40 portfolio of stocks and bonds, as shown in the next graphic.

Allocation to international equities is expected to reduce portfolio  volatility


A line graph sloping down from left to right, showing that portfolio volatility decreases as exposure to international equities increases.

Source: Vanguard.

Notes: Ten-year expected returns are based on the median of 10,000 VCMM simulations, as at 30 September 2020, in EUR. Euro-area bond allocation is defined as the global market capitalisation of euro-denominated bonds. Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

This analysis was based on market return projections made in 2020 and our latest asset return forecasts may produce slightly different results if run again, but we believe the broad message stands – that euro area investors can reduce portfolio volatility the more they allocate to global markets.

Access global markets through LifeStrategy

While our research here is focused on global equity market returns, the principles outlined apply equally to bond market exposures. Based on our research and extensive experience in providing multi-asset solutions for long-term investors, we believe a global market cap-weighted approach to markets is a good starting point for all investors.

That’s why Vanguard’s range of LifeStrategy ETFs offers access to world markets through four global market cap-weighted portfolios with different equity/bond ratios that cater to the spectrum of client preferences and objectives.

A moderate tilt to home markets may be appropriate for some investors, which is where advisers can add value by weighing up a client’s individual needs and objectives with the risks of a home bias before guiding on a suitable portfolio allocation.


S.J. Donaldson; H. Ahluwalia; G. Renzi-Ricci; V. Zhu; A. Aleksandrovich, 2021. ‘Global equity investing: The benefits of sizing your allocation’.

Sources: Vanguard calculations, based on data from the IMF’s Coordinated Portfolio Investment Survey (2019), FactSet and MSCI. Notes: Data correct as of 31 December 2019, calculated in USD. Domestic investment was calculated by subtracting total foreign investment (as reported by the IMF) in a given country from its market capitalisation in the MSCI All Country World Investable Market Index. Given that the IMF data are voluntary, there may be some discrepancies between the market values in the survey and the MSCI All Country World Index Investable Market Index.

N. Strong; X. Xu, 2003. ‘Understanding the equity home bias: Evidence from survey data.’

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