Home Team Bias Cramping Your Investment Success?
Video Transcription: I’m a Saints fan, I’ve always been a Saints fan. I was a Saints fan when the Saints were bad and I’ve been a Saints fan ever since they drafted Drew Brees. Let me tell you, ever since they drafted Drew Brees, to me every year is a potential Super Bowl year. You know what I’m talking about.
What the heck does being a Saints fan have to do with money? Well, not much really, however, there’s a lesson here.
Familiarity Drives Our Decisions
There’s something called home country bias. What home country bias says is that we tend to favor companies and products that come from our region or from our country of origin. So where we live influences our everyday decisions. I’m in New Orleans. I’m a Saints fan, the Saints are going to win the Super Bowl every year, there’s no question about it.
Home country bias is about familiarity. We’re more comfortable with the things we’re familiar with.
Regional Investing Behaviors
This is fascinating. Check this out from an investment standpoint.
Southern investors are 26% more likely to invest in energy than the rest of the country. Why? Because so much energy comes from where? The Gulf of Mexico.
West Coast investors are 20% more likely to invest in tech vs. Midwestern and Southern investors. Why? Because a lot of tech companies are where? Out west.
East Coast investors are up to 23% more likely to invest in financials. Why? So many financial companies are located in the Northeast.
Finally, Midwesterners are up to 22% more likely to invest in industrials. Why? So much industry and manufacturing is located in the Midwest.
Now some of this might have to do with the fact that because there’s such a high concentration of these companies in these particular industries people’s retirement plans may be tied to their individual company’s stock but regardless those numbers are staggering. So this is what we call home country bias. We’re going to invest in the things that we’re more familiar with.
The Commercial Fisherman
Let me give you an example of home country bias. I met with a potential client who was a commercial fisherman. He was understandably uncomfortable with the stock market; it was unknown to him.
I proposed this hypothetical scenario to him:
You have $100,000 to invest, you have two options:
- You can either invest it in a new startup commercial fishing operation in Southeast Louisiana.
- You can take the $100,000 and invest it in the stock market; let’s say an S&P 500 index fund.
Understandably he picked the startup commercial fishing operation. Familiar, right? Home country bias at work.
My next question to him was:
“What are the risks that this commercial fishing operation faces? What are the things that could potentially cause the business to fail?”
Quick context: This discussion was on the heels of the BP oil spill.
An oil spill could impact the fishing operation. Other environmental disasters could impact the business. Louisiana’s receding coastline can impact the commercial fishing operation. A hurricane can impact this type of business. So there’s a lot of risks associated with a commercial fishing venture.
The Stock Market
When we looked at the stock market we started talking about different risks and they are risks that exist, however, historically, we know that the stock market will perform well over time. For example on a 20-year rolling period starting in December 2017 going back 20 years the S&P 500 averaged 7.2% per year. Those aren’t bad numbers. Yes, there are risks involved, but those risks can be managed.
What’s the point?
The point here is how home country bias clouded this individual’s investing decisions. Home country bias isn’t necessarily bad, but it’s something that you have to be conscious of.
Home Country Bias and My Fantasy Draft
When I draft my fantasy football team I have to be conscious of the fact that I think every Saints player is going to outscore every other player in fantasy football.
Side note: I sacrificed week 6 this year. The Saints were on a bye and half my fantasy team are Saints.
Be Aware
When you make investing decisions you just have to be conscious of these biases so you can make the best financial decisions.
Sometimes good to meet with a third party, to meet with a financial planner. You can find me on my website www.plan-wisely.com. Send me a message or schedule some time below. I’d love to have a conversation with you about your investments.
