Ben Felix - Is Home Country Bias a Mistake?

Short Summary

Main recommendation: Some home country bias in equity portfolios is sensible, with roughly a 30 to 35% allocation to domestic stocks cited as historically optimal for developed-market investors, while extreme home bias is harmful. Ben Felix argues that the textbook capital asset pricing model's market-cap-weighted portfolio (about 3% Canadian stocks for Canada) ignores real-world costs, taxes, consumption risk, and foreign-investor expropriation risk, which together justify a moderate tilt toward home stocks.

Key Points

• Canadians often hold more than 50% of their portfolios in Canadian stocks, although Canada makes up around 3% of the global market, which is the gap the "home bias puzzle" refers to.
• Under the ICAPM (intertemporal capital asset pricing model), investors care about how holdings behave relative to their own local consumption costs, such as the price of maple syrup, so Canadian companies whose cash flows hedge local price changes can justify some home bias.
• Historical foreign-investor mistreatment (wars, market closures, nationalizations, and recent cases in Argentina in 2019 and Russia in 2022) is a risk that domestic holdings largely avoid.
• Simulations of 1 million return paths using a block bootstrap from data back to 1890 through 2019 found about a 35% domestic allocation was optimal across the full retirement life cycle, with the US as the main exception.
• Independent analyses support the same range: a Vanguard 2023 study (data 1999 to May 2023) found about 30% in Canadian stocks optimal, and Felix's own analysis (1900 to 2022) found 30 to 40%.

Details Worth Noting

• Concrete instructions: The video gives no step-by-step procedure for building a portfolio. The actionable guidance is to hold roughly 30 to 35% of the equity portion in domestic stocks, avoid extremes such as 100% domestic, and prefer low-cost index or asset allocation ETFs, which in Canada typically carry a home bias.
• Domestic allocations between 5% and 50% produced relatively small differences in outcomes, while a 100% domestic allocation performed much worse.
• The bootstrap results do not account for the lower costs and taxes of investing domestically, so they may understate the case for home bias.
• Canadian tax treatment matters: dividends from a Canadian corporation receive credit for corporate taxes paid, while dividends from foreign companies receive no such credit, raising the relative tax cost of foreign stocks.
• Smaller countries by total market capitalization have tended to have higher stock returns than larger ones, and Denmark (only 16 holdings) was the best performing developed-country index since 1970, which Felix uses to argue against the "too few companies" concern.
• Felix notes the findings may not extend to emerging-market investors, and that the Vanguard and his own results carry caution because they depend on specific time periods.

Bottom Line

Holding a moderate home bias of roughly a third of equities in domestic stocks is supported by theory, practical costs, and historical data, while keeping it moderate avoids the risks of concentration; this is the video's general analysis of the research rather than a specific recommendation.