Home or away. Investors everywhere hold more of their own country’s assets than portfolio theory predicts. Whilst this is alright when the home bias generates superlative returns, the opposite may create inefficiency, and sub-optimality. The more useful question for a family office is not whether home bias exists but what is the cost. The best-known evidence suggests that the answer moves with market correlations. Now, what can we do about it.
The argument
Home bias is a robust finding. Lewis’s review of the literature concludes that investors hold a substantially larger share of their wealth in domestic assets than standard portfolio theory would suggest.1 The pattern is not confined to countries. Coval and Moskowitz found that US fund managers also prefer firms headquartered close to them, so a bias towards the familiar operates at the regional level too.2
Familiarity is not always irrational. The same authors later showed that US fund managers earned an average of 2.67 percent a year more on holdings within 100 kilometres of their headquarters than on distant holdings. Adjusted for risk, local holdings beat passive benchmarks by 1.84 percent a year.3 This is consistent with an informational advantage. It describes professional managers with research teams and local access. It does not show that a private investor gains the same edge from holding assets at home.
The cost of the bias is not fixed. Levy separates the share of a portfolio held at home from the economic loss that share causes. In his analysis the US investor held 77.5 percent of the portfolio domestically, yet the economic cost of the bias was becoming negligible. The reason was that correlations between foreign and domestic markets rose from about 0.4 at the end of 1988 to about 0.9 in recent decades, so foreign assets added little diversification. Correlations have fallen since 2009, which Levy notes could bring the cost back.4
| Question | What the literature shows | Evidence grade |
|---|---|---|
| Is home bias common? | Yes, in equities and within countries | Moderate (US/G7 data) |
| Can local holdings earn an edge? | For professional US fund managers, yes | Moderate, not transferable to private investors |
| Is the bias costly? | Depends on cross-market correlation; low when correlation is high | Moderate for the US, weak elsewhere |
What the studies do not tell us. Every study above rests on US or G7 data. None addresses an Indonesian investor whose wealth, income and liabilities are largely in rupiah. For that investor the exposure is not only to domestic equities but to one currency, one regulatory regime and a comparatively shallow capital market. None addresses the narrower investable universe that sharia screening produces, or the diaspora household with liabilities in a host currency. We found no qualifying peer-reviewed study (Scimago Q1 to Q3) that measures the cost of rupiah concentration for Indonesian high-net-worth households. Nothing in the evidence reviewed lets us put a number on it, and any claim of a specific cost or benefit for this group would be unsupported.
The correlation channel is the transferable idea. If diversification benefits depend on how differently markets move, then they are an empirical, time-varying quantity that should be measured for the assets and currency in question, not assumed from a rule of thumb in either direction.
What this means for ordinary Indonesians
- Corporates: Treasury concentration in one currency is a different risk from a shareholder’s portfolio concentration. Where a business has foreign-currency costs or debt, the relevant question is how its cash flows and liabilities line up, which this evidence does not address.
- Affluent households: The findings concern large, mostly US portfolios. They offer no basis for a household-level rule on how much to hold abroad, and they say nothing about costs of access for smaller investors.
- HNWI / family offices: Treat the home-versus-foreign split as a measurable policy choice. Review it against current correlations, the sharia-screened universe actually available, and currency of future liabilities, and document the reasoning. Evidence on rupiah-specific outcomes remains thin.
References
This article is for general information and education only. It is not investment, tax, legal or Sharia advice and does not consider your personal circumstances. Please consult a qualified adviser before making financial decisions.
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Lewis, K. K. (1999). Trying to explain home bias in equities and consumption. Journal of Economic Literature 37(2), 571-608. Scimago Q1, Economics and Econometrics (SJR 2025). DOI: 10.1257/jel.37.2.571 ↩
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Coval, J. D. & Moskowitz, T. J. (1999). Home bias at home: local equity preference in domestic portfolios. Journal of Finance 54(6), 2045-2073. Scimago Q1, Economics, Econometrics and Finance (SJR 2025). DOI: 10.1111/0022-1082.00181 ↩
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Coval, J. D. & Moskowitz, T. J. (2001). The geography of investment: informed trading and asset prices. Journal of Political Economy 109(4), 811-841. Scimago Q1, Economics and Econometrics (SJR 2025). DOI: 10.1086/322088 ↩
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Levy, H. (2017). What is the economic cost of the investment home bias? Journal of Money, Credit and Banking 49(5), 897-929. Scimago Q1, Finance (SJR 2025). DOI: 10.1111/jmcb.12400 ↩
Editor’s note: This article was drafted with AI research assistance, before I began writing every article myself. Sources are cited above.
