What is Home Bias?

Home bias refers to investors overweighting their domestic market in their portfolios, even when a globally diversified approach might be more optimal.

• Share of European countries in MSCI ACWI (in Feb 2025)

Pros of Home Bias (for European Investors)

✅ Currency Stability: Investing in your home currency (EUR) reduces FX risk and volatility.

✅ Tax & Regulatory Simplicity: Some local investments have favorable tax treatment.

✅ Familiarity & Accessibility: European investors may feel more comfortable investing in local companies they understand.

Cons of Home Bias

❌ Misses Global Opportunities: The European stock market (~15% of world market cap) is small compared to the US (~65%). Avoiding the US means missing a dominant part of global economic growth.

❌ Sector Concentration: Europe has fewer tech giants (Apple, Microsoft, etc.), which have driven market returns.

❌ Lower Historical Performance: Over the last 20 years, US stocks have outperformed Europe significantly. Betting too much on Europe can hurt returns.

Verdict: Should European Investors Have a Home Bias?

• A slight home bias can be justified for currency and tax reasons (e.g., overweighting Eurozone stocks to hedge against FX risks).
• However, a fully home-biased portfolio is risky since it limits exposure to faster-growing markets like the US and Emerging Markets.
• A good compromise is using an All-World ETF (which already includes ~15% in Europe) and, if needed, slightly increasing Europe exposure (e.g., through an additional Euro Stoxx 600 ETF).