
INVESTORS CONFUSE THE FAMILIAR WITH THE SAFE
By Larry Swedroe
When ATT was broken up shareholders were given shares in each of what were called the Baby Bells. A study done a short while later found, however, that the residents of each region held a disproportionate number of shares of their local regional Bell. Each group of regional investors was confident that their regional Baby Bell would outperform the others.
Baby Bell
How else can you explain each investor having most of their eggs in one baby basket? Other examples of familiarity breeding investment are that Georgia residents own 16% of all Coca-Cola stock, and people in Rochester tend to own stock in Kodak and Xerox. This is not Lake Woebegone where all Baby Bells can outperform the average of the group. This story is a good analogy for the way domestic investors view non-domestic assets.It seems to be a global phenomenon that most investors hold the vast majority of their wealth in the form of domestic assets. While the data is a bit stale, I don’t believe that much has changed. In 1990 the domestic ownership shares of the world’s five leading stock markets was United States 92%, Japan 96%, UK 92%, Germany 79%, and France 89%.2 With the relative freedom of capital to travel around the world, the lack of global diversification cannot be explained by capital constraints. The only explanation is that investors in each country believe that their domestic market provides the best/safest investment opportunities. Investors in all five countries were taking the unnecessary risk of having “all their eggs” in their domestic basket, without any rational reason for doing so. It is simply a behavioral issue.

A study found that the expected real return to U.S. equities was 5.5% in the eyes of U.S. investors, but only 3.1% and 4.4% in the eyes of Japanese and British investors, respectively. Similarly, expected returns on Japanese equities was 6.6% in the eyes of Japanese investors, but only 3.2% and 3.8% in the eyes of U.S. and British investors, respectively.3 Familiarity breeds overconfidence, or an illusion of safety, and lack of familiarity breeds a perception of high risk.
Many investors avoid adding international investments to their portfolios because they believe international investing is too risky. Academics, however, recommend that investors add international assets to their portfolios because they actually reduce risk. International equities do not move in perfect tandem with domestic equities. Therefore, the addition of international stocks to a portfolio should reduce the volatility (risk) of the overall portfolio. A study published issue of the Journal of Investing sought to determine whether international equity diversification actually provided that theoretical risk reduction benefit.
The study by David Laster examined the performance of portfolios with varying allocations to the S & P 500 Index and the EAFE Index. The study looked at portfolios with allocations of 10% S & P 500 and 90% EAFE, 20% S & P 500 and 80% EAFE, and so on. At the end of each year each portfolio was rebalanced (correcting for market movements) to its original allocations. Using a statistical method called “bootstrapping” (creating a series of monthly returns using randomly selected subperiods from the entire period), the study was able to effectively examine far more 5-year holding periods than its 27-year period contained. Before reviewing the results of the study it is important to note that during this period the S & P 500 Index outperformed the EAFE Index by 12.29% to 12.03% per annum. In addition, the correlation of returns between the two indices was 0.48, a fairly low figure.
The study concluded that:
- A combination of the S & P 500 Index and the EAFE Index outperformed either index individually-a result of the low correlation.
- Increasing the international allocation to as much as 40% increased returns and reduced risk as measured by standard deviation (volatility).
- An allocation of 40% international produced the highest Sharpe ratio-a measure of the amount of return for a given level of risk.
- Increasing the international allocation from 0% to just 20% reduced the likelihood of negative returns by one-third.
- Investors with a 10% international allocation could be 98% certain that they would reduce risk by raising the international allocation.
- Investors with even a 22% allocation could be 90% certain that they would reduce risk by raising their international allocation.
What is likely to surprise most investors is that adding international assets to a portfolio during a period when they underperformed actually resulted in higher returns and lower risk.
Perhaps the most common argument I hear against international investing is that the regulatory environment created by the SEC makes the U.S. a safer place to invest. I fully agree that this is true. However, before believing that you can benefit from this information you must ask yourself if you are the only one that knows it. Obviously, the market is aware of, and security prices around the world surely reflect, this information.
Here is something else to think about. Perhaps one of the contributing factors to the strong returns U.S. stocks have provided over the last 50 years is the improvement that the SEC has made in its oversight of the U.S. capital markets. It seems logical to conclude that this improvement has contributed to the lowering of the perception investors have of the risks of equity investing in the United States. The result was a lowering of the risk premium investors demand. That resulted in a one-time capital gain, and lower future expected returns (reflecting the now lower perceived risk). Now applying that to foreign stocks you might draw the following conclusions. The market knows that foreign stocks are riskier because of the more lax regulatory environment. The market therefore prices for that risk and you get higher expected returns as compensation. Let’s now speculate on the following possible, if not likely, scenario.
The world has learned much about economic growth over the past 50 years as capitalism has triumphed. In order to grow their economies countries need access to capital. If a country does not have good disclosure laws, investors simply won't provide capital. Therefore, I think it is logical to conclude that the rest of the world will be moving to replicate U.S. regulatory standards. In fact, many foreign companies are already adopting U.S. accounting standards, as they want access to the U.S. capital markets. As more international companies and foreign markets adopt U.S. regulatory standards the risk premiums demanded for international stocks might fall as investors recognize the change and lower their required risk premium. Investors in international stocks would then realize a capital gain from the fall in the risk premium.
Let’s assume that you believe that the U.S. is safer (keeping in mind that investors in other countries also appear to believe that their domestic market is safer) because the economic and/or political prospects are better in the U.S. You should then conclude that the U.S. has lower expected returns. This would not mean that the U.S. was a poor place to invest. However, it is illogical to believe that the U.S. is a safer place to invest, while also believing that the U.S. will provide higher returns. Risk and expected reward should be related.


INVESTORS INTELLECTUAL CAPITAL
There are other arguments for including international asset classes in a portfolio. U.S. investors have all of their intellectual capital in the domestic market. Their ability to generate income from employment is tied to U.S. economic conditions. They also might own a home, which may constitute a large percent of their assets. If the dollar falls in value on the currency markets, not only will the cost of imports rise, but the competitive pressures from cheap imports will also decrease, allowing domestic manufacturers to raise prices. This combination of events will lower living standards. Owning foreign assets acts as a hedge against this risk.Allocating a significant portion of your portfolio to international asset classes will provide an insurance policy against potential problems in the U.S. Since we don’t have a clear crystal ball, diversification of risk is an important element of the winning strategy. If you need any more evidence of this just think about Japanese investors in 1989. Like U.S. investors in 2000, they may have seen no reason to diversify internationally. Their economy was king. Their technology was dominating the world. Their managed capitalism system was clearly superior to our more market oriented system. And, the Japanese stock market had far outperformed the U.S. and other global markets for 20 years. As we ended 2000, the Nikkei Index was still down approximately 70% from its level of over 11 years ago. Those who do not learn from history are doomed to repeat the same mistakes.
Investing in international equities surely involves risk, but so does investing in domestic equities. And, the evidence suggests that including international equities within a portfolio reduces the overall risks of the entire portfolio.
Sources:
1. Gus Huberman, Familiarity Breeds Investment, September .
2. Kenneth R. French and James M. Poterba, “International Diversification and
International Equity Markets,” American Economic Review, vol. 81, No.
2, pp. 222226.
3.Gus Huberman, Familiarity Breeds Investment II.
Larry Swedroe is the author of The Only Guide To A Winning Investment Strategy You Will Ever Need and What Wall Street Doesn't Want You To Know, available at amazon.com. He is also the Director of Research for and a Principal of Buckingham Asset Management, Inc. in St. Louis, Missouri. Investors Confuse The Familiar With The Safe. Article By Larry Swedroe Inc.

Seeking safer investments can lead you to confuse the familiar with the safe! Research investment choices. Keep up to date, speculate, diversificate and accumulate.
Finance

Expert Advisor Impala Single License: Expert Advisor Impala Single License
Lifetime update
Double License: Expert Advisor Impala Double License
SEO Link Directory Script Great Price at $49.00
HTML Rotate Pro Download Trial: HTML Rotate Pro Shubham Housing Finance | Affordable Housing Loan in India | Apply for Home Loan Online! Investors Confuse The Familiar With The Safe/a>




Amish Outdoor furniture. ~ Your online bookstore. Great variety and value on books and eBooks for every age and interest. Since 1941. ~ Custom Wine Labels

Nanjing mountain stone Software Co., Ltd. ~ Dress US$ 9.99 Hot Sale Girls Tutu Slip Summer Dresses ~ https://www.kidshoo.com/Free-Giveaway-The-Original-Reversible-Octopus-Plushie-Plush-Animal-Doll-Toy-p1372960.html ~ Flowers
Lots of Fonts


Thank You for your continued support.
We ourselves feel that what we are doing is just a drop in the ocean. But the ocean would be less because of that missing drop. By ~ Mother Teresa




Thank you Bonnie


a2000greetings

"We have variety pages, information, news and resources! With lots to see and do. Enjoy your saty and may your day have smooth sailing! Thank you for joining us and for visiting our family friendly, multi functional web site portal. And for your continued use and suppoet of this website.
As a Verified Member of PayPal. We use E-commerce services pages for safe downloads and sales. Your payments are securely processed. We proudly display the PayPal Seal on our website. Sales, Ads and your Donations help to keep this website going.
Donate to A2000greetings.
If your would like to advertise send us info at advertise (to) a2000greetings.com. Thank you.
Enjoy your stay.
SITE MAP
Home a2000greetings.com
National Anthem of the Republic of Ireland
Shopping easya2000greetings Community Forum
USA
United States Of America Information
The Declaration Of Independence
Signers Of The Declaration Of Independence
BALD EAGLE AMERICAS NATIONAL EMBLEM
Aerospace & Defence & Astronomy
Entertainment
Puzzle IQ Test Brain Test Young
Investors Confuse The Familiar With The Safe
Plus Alternative Medicine Information and News
Carousel Carousels The Golden Age
Poetry
Wolf Poem Miracles In the Snow
AnimalsANIMALS
Dog Smart Grooming And Boarding Needs
The Wolves Legend of Two Wolves
Holistic Approach to Pet Health Care
Animal Meaning Spirit Animal Totem
Poem Lend Me A Pup
Golden Retriever Irish Setter Magic
We do hope you enjoy this Humor section HUMOR / Comedy / JOKES
Humor
Five Houses of Worship with Squirrels
Police Man Did You Laugh Today
Top 10 Things only Women Understand
Funny Pocket Tazer Stun Gun Story
Some Deep thinking from George Carlin
Family Resources
Children's Safety Helping Kids at a2000greetings Helping children with a personal touch, children's safety. A200greetings has information for helping kids around the world. Protect kids for generations.
There Must Be No More Carlies, Article by: Linda Spagnoli
PEOPLE HELPING PEOPLE For Humanity
MothersMother's Day Word Scramble Search Puzzle
Covid-19 & RSV Virus Information
INDIAN
American Indian Information
Indian Search Puzzle Printable
Wolves In Native American Folklore
Books and author of best native American fiction in 2011.
Bridal and Wedding
Planning a Wedding and Organizing a Bridal Shower
Brides Maids Dress Up Game Play
Games
Toys Games
Family Resorces
Play Glitter GamePlay Shrek Forever After Puzzle
Play Tetris Tetricopy Explorer
Puzzles
Puzzle IQ Test
Crossword Puzzles Daily Online Play
Indian word search puzzle Printable
Puzzle Software Puzzle Applet Puzzle World Games
Check our holiday section for lots more puzzles.
Casino
Casino Game Fun
Software
Software Electronically Downloadable
Web Site Management Software at a2000greetings
Software : Audio : Featured Tracks
Virus Information and Products
Business for Windows Based Software
Automation schedule recurring tasks Workshop Software
Convert animated GIFs to Adobe SWF file format
Free RX Discount Card Printer Friendly
Articles
Get to know Jerrie Cobb Who's Driving the Bus?
Holistic Approach to Pet Health Care
Dog smart policy for your dogs grooming and boarding needs Basics of Dog Training
Organize Your Stuf Five Minute Organizing
Gifts for him or her for the Holiday's
What Men Really Don't
Want for Fathers Day
15 Minutes A Day To Organizing Your Home Office - Advanced tasks and schedules manager software
Website Usability Leads to Conversions
Increase Your Web Site
Traffic By Using
Keyword Articles
How to Build a Website Around Keywords
How to Increase the Ranking of Your
Page
The Perfect Book and Where to Find It
How To Create Multiple Streams of Online Income
One of my favorite things about being an Internet Entrepreneur is that I can literally wake up in the morning with an idea for a new product and have it become a reality by the afternoon. Or I can find new ways to promote an existing product. Or I can join a new affiliate program or pursue a joint venture. Every time I repeat this process I create a new stream of income to add to my existing revenue base.
Read more;
The Perfect Home Based Business
Are you looking for a Business you can Work at Home? Did you know that a Work at Home Business is the dream of millions of Americans, and millions more world wide? It is estimated that over 68% of us will have some kind of Home Business to help supplement our income. Plus, numerous surveys show that a Business of your own is still the #1 way for the average person to achieve financial freedom and independence. Read-More The Perfect Home Based Business
a2000 Greetings Flash Games
Helps tens thousands amateurs and professionals involved in stock photography in preparing and uploading their images to leading stock photo agencies.. a2000 Greetings Flash Games
How To Market Your Home Business On A Shoestring Budget
Ways To Generate Online Income
Self Publishing for profit and pleasure
Creating Your Professional Image on the Internet
Design Solutions-Take
your website to a new height
How To Set Up A Professional Website On Your Own Using Web Templates
Free Traffic Exchanges are King
How Traffic Exchange Sites Work
Making Targeted Traffic Work for You
Build websites easier with premade templates
Google Wants To Help You Succeed
Listed Websites Affect Rankings
We are allways adding more to Family Holidays
Family Holidays
Happy New Year
Easter Mom Ma And Easter Memories
Mother's Day Word Scramble Search Puzzle
Father's Day Contest Story - a2000greetings
4th Of July or July 4th Celebration
- Valentine's day
- Romantic Love by Paul Faulkner
- Traditional Valentine's Day
- Love Quotes
- Romantic Story
With a pinch of the luck of the Irish and hug.


Happy St Patrick's Day
Four-Leaf Clover Fun & Info.
An Irish Friendship Wish
The National Anthem of the Republic of Ireland & Irish National Anthem Gaelic
St. Patrick's Day Word Search Puzzle Free
St. Patrick's Day Child Maze Printable(Free)
Thanksgiving Word Search Printable {Free}
Labor in AmericaSanta's Comming To Town
- Santa Is Coming To Town
- Claus
- St. Nicholas
- Santa Claus's First Portrait
- A Christmas Wish
Welcome to a Merry Christmas and Happy Holiday!
Welcome to the Christmas Time - Animated Wallpaper
Halloween Fun Scare(Our Other Site)
Spirit Pages
Garden Of Friendship
Our a2000greetings website guardian angel came out looking like my mom.
Angels Of The Garden
Our WOSIB 2008 Anniversary Page One
Our WOSIB 2008 Anniversary Page Two Adoptions for Us

Webmail
a2000greetings Fun Free Professional and Customizable E -mail Cards
Action Figures and Bobble Heads
Poster Prints & Custom Framing
Community
Welcome to a2000greetings Community Forum - Index
Computer Geeks make Better Husbands
Top 12 Things Not To Say To A Cop
Golden Retriever Irish Setter Magic
Bald Eagle Americas National Emblem
Web Directories
Search Engine Web Directory
Website
Webmaster Resources
Webmaster Resources & WEBSITE BUILDING
Webmasters Tech resources easy webmaster solutions
Resources for Webmasters at a2000greetings
My IP unique ID Address IP Number
Keywords Information For Webmaster at a2000greetings
Search All Website Search Ideas Search Articles
Color Chart is popular with web developers
Leverage Browser Caching Positive Company Branding
Make 3D Headings and Banners Free
Web Site Building at a2000greetings
Easy Banner Web Site Ad Rotator
WEBSITE CONTENT
Free Website Content Page 1
Things for your site Page 2
More Free Content For Websites Page 3
Website Templates All Kinds Halloween Pumpkin Carving Templates More Business and Finance Website Templates Flash Templates
Twas The Byte Before Christmas
Revolution Studio & Dreamcard
Palmdevice
Guest Book
PRODUCTS
MPEG Encoder Ultimate
Organizer Planner Software, & Ebooks
Quantcast for a2000greetings Report
, a2000greetings SEMrush Rank 9.9M (Last Checked)
Webstatsdomain for a2000greetings 100/100 Web Reputation for a2000greetings is 100/100
Our Web Safety Results / McAfee Site Advisor
a2000greetings Alexa Global Rank 7,526,911 last checkedAdd Us To your site. Thank You. Use and Refer a2000greetings
Add To Favorites / Bookmark Us
Safe Surf Rating for a2000greetings. Certification Child Safe For Web Design and Developers
Designed: By Susan an a2000greetings brand.
Our Brands
Halloween Fun Scare International Haunted House | Add Babies | Webhost-Websites | Our Holiday Site | 2000greetings




a2000greetings Code OF Ethics - Advertise - Comments Policy - Contact Us - Disclaimer Earnings Income - Disclosure Policy - Privacy & Cookies Policy - Public Relations / Press Release - Spam Policy At A2000greetings - Terms Of Use - Trust Go To The Top Of The Page
Home

