Bounded Home Country Bias
Tilt 10-30% to your home market for cost, tax, and geopolitical resilience
A pure market-cap-weighted global portfolio would put a Canadian or UK investor at roughly 3-4% of their domestic market. Felix argues that's actually too low. Cost and tax efficiency, local consumption hedging, and protection from foreign-investor expropriation in geopolitical crises all justify some additional weight — but not the 60%+ bias many domestic investors actually hold.
The framework defines a defensible band: roughly 10-30% in your home market. Below that, you give up real cost and tax advantages and lose useful consumption-hedging properties. Above it, you take on uncompensated concentration risk in a single national economy. The goal is to land inside the band based on portfolio cost, tax wrapper, and your own labour-income correlation with domestic equities.
This is a small but high-leverage allocation decision because it sets the structural skew of every other piece of the portfolio. It also pushes back against two common errors: full global market-cap (too little home) and recency-driven US tilts or large home overweights (too much concentration).
- Pure market-cap weights ignore investor-specific costs, taxes, and consumption.
- Some home bias is rational; large home bias is not.
- Foreign investors can be expropriated in crises; domestic holdings are safer in that scenario.
- Labour-income correlation reduces — but doesn't eliminate — the case for home bias.
- The optimal range is wide and forgiving; precision inside it doesn't matter much.
- Start from global market cap as the baselineCompute what a pure market-cap-weighted global equity allocation looks like for you (e.g. ~3-4% Canada or UK, ~60%+ US today). This is the neutral starting point before any tilt.
- Adjust for cost and tax efficiencyDomestic ETFs are usually cheaper and more tax-efficient than foreign equivalents. Add weight to home equity until the marginal cost/tax saving is exhausted, not because of any forecast.Pro tipIn Canada and the UK this typically pulls the allocation up by several percentage points purely on fees and dividend withholding.
- Consider labour-income correlationIf your job and human capital are heavily tied to the domestic economy, lean toward the lower end of the band; if your labour income is global (e.g. multinational employer), lean higher because the diversification cost of home bias is smaller.Pro tipAt a 0.5 income-domestic correlation the optimal home allocation in the Beyond the Status Quo paper falls to about 18%, not zero.
- Add a geopolitical-resilience tiltRecognise that foreign investors can be cut off from holdings during conflict (the Russia case). A modest additional home weight provides insurance against that scenario without much cost in normal times.WarningDon't double-count this with currency hedging or with overweights to your own employer's stock.
- Land inside the 10-30% band and stop tinkeringPick a number you can hold for decades — somewhere between 10% and 30% of equities for a small-market investor. The empirical evidence says precision inside the band doesn't add much; consistency does.WarningBeyond ~30% you're taking concentrated single-country risk that historically lowers expected utility.
Felix uses the recent Russia case: Russian stocks didn't go to zero, but for foreign investors they effectively did. Domestic investors retained access while foreigners were expropriated.
Felix points out that BlackRock, Vanguard, and Dimensional Fund Advisors all build significant home bias into their Canadian asset-allocation ETF suites — typically around a third — even though their underlying philosophies differ.
Felix arrived at the framework via Cederberg et al.'s 'Beyond the Status Quo' paper on asset allocation for long-term investors, which he calls the single research piece that most changed how he thinks about portfolios. The paper finds optimal home weights of roughly 10-30% across a range of labour-income correlations. Eugene Fama's appearance on Felix's Rational Reminder podcast added the geopolitical-expropriation argument he hadn't previously considered.