How to Avoid the Pitfalls of Home Country Bias in Investing – Episode #558

Is your investment strategy too focused on your home country? It’s time to broaden your horizons. On this episode of the Dentist Money Show, Matt, Rabih, and Ryan dive into the critical importance of global diversification. They explore how home country bias can limit your portfolio’s potential, leaving you exposed to unnecessary risks. Discover why investing beyond your borders is essential for achieving a truly diversified and resilient investment strategy.

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Podcast Transcript

Intro: Hey, everybody, welcome back to another episode of the dentist money show brought to you by Dentist Advisors. We have a great show for you today in studio, Rabih Ryan and I talking about proper diversification with an investment portfolio and specifically home country bias, and how it can have a major impact on the long term returns of your portfolio, and how to better address diversification in a portfolio for long term success with investing. As always, hope you enjoy the show.

Matt Mulcock: The gang’s back together. I love this. Rabih, Ryan, I’m here. We’re talking about something super technical that we know nothing about. So it can’t just be you and me.

Ryan Isaac: Yeah. So, we’ve got some questions we’re going to hit today with Rabih and, you know, just get like we always do with him, get some science and some math and some data perspective behind some of these things. These questions are very, very common. Um, I assume Matt, as I go through these, you’re probably having conversations like these all the time.

Ryan Isaac: and they do tend to spike during different times, depending on what’s going on in the markets. But here’s kind of the, the overview of what it’s going to be today. So, something called home country bias, building a portfolio of, international stocks or not diversifying your portfolio or not. And, the tendency, I think the theme here is also the tendency to look back at what’s recently happened and then assume that’s what’s going to always happen. Recency bias, and kind of ignore other history or other probabilities. So some of the questions that prompt this. I’ll give you a specific example. These are, recent examples that have been conversations with the

Matt Mulcock: Recent frustrations, one might say?

Ryan Isaac: It can be. Yeah. I mean, you know how this goes. these questions are totally valid. They’re very reasonable questions to ask. You can see exactly how someone arrives at these questions logically, but it can be frustrating to, it’s like we were saying in the podcast yesterday, at some point you kind of have to have faith in like the science of it all.

Ryan Isaac: You know, and the data of it all, which is hard to do, you know, to just like believe and trust things that didn’t happen in your lifetime and that are going to maybe happen in the future. It’s hard to do sometimes.

Matt Mulcock: Well, just to that point, really quick, the recency bias one is really tough. We talked about this on another podcast with Jake recently, right? Where we’re like, it’s really difficult to tell a client when you’re in the in the, middle of either a panic or in the middle of a craze going on.

Matt Mulcock: Like we talked about, like in the recent example of like crypto craze and it’s really hard to tell a client,

Matt Mulcock: Hey, your brain’s tricking yourself. You like this, you’re the problem. You got to just trust us. Just stick with the plan.

Ryan Isaac: Yeah, great answer. When

Matt Mulcock: they’re sitting here saying. I’m seeing my buddies get 30 percent or 60 percent returns this year, and we’re only at 20.

Matt Mulcock: What’s happening? I guess we’re just highlighting it’s really difficult. Like, you understand the

Ryan Isaac: Dude, you totally

Matt Mulcock: Valid questions. It’s really hard for us to say, Hey, we’re playing a 30, 40 year game here. We’re not playing a one year game.

Ryan Isaac: Yep. And data and history does matter. So here’s a specific question that kind of kicked us all off and why I reached out to you guys and said, hey, let’s talk about this.

Ryan Isaac: A client, and this is a common question

Matt Mulcock: you said, Hey, Rabih, we gotta do a podcast on this. Matt, you can come too

Ryan Isaac: It’s basically like Rabih, I’m going to ask you some questions. Me and Matt will sit on the couch and look at you and you just talk for an hour.

Rabih Dimachki: Pressure.

Ryan Isaac: And by the way, this isn’t like one person’s asking, this is a common question this question always comes up. The question is, Hey,

Ryan Isaac: Asking for a friend.

Ryan Isaac: We are reviewing a portfolio. And it so happens that the review of this portfolio of this period of time, we were looking back 12 months, the returns had been really great. The returns have been really great. This is an internationally diversified portfolio.

Ryan Isaac: Like we build for our clients. Like I hold, you hold, you hold. the comment was though. cool return. That’s great. And it was, it was like well above average return for, you know, historical averages. But had I only just held the S and P 500 had I only been in the U S it wouldn’t have been 17 percent return.

Ryan Isaac: It would have been 25 or something. And then the natural question, and it is a natural question. The followed was, why don’t I just hold that? Then there were some assumptions like the U S always outperforms international stocks. I’m better off just holding the United States. There’s built in assumptions around what the 500 biggest companies in the United States are and represent.

Ryan Isaac: You know, there’s some misunderstandings about what they are or not. So

Matt Mulcock: there’s another bias here that you’re alluding to is, hindsight bias. It’s easy, it’s really easy to look back and say, oh, this did this, this did that. Why didn’t I just do

Ryan Isaac: Mm hmm.

Matt Mulcock: Again, you’re tricking yourself

Ryan Isaac: A hundred percent. and I’m sure you’ll get into this too because this, this specific person, again, this is a common question, hadn’t lived through the decade of the 2000s with the United States.

Ryan Isaac: And to your point about it being sometimes frustrating is, and we’re all like this, it’s hard to, Relate to something we haven’t lived through. We haven’t experienced just because someone’s talent firsthand. So as I’m explaining this, like, yeah, but if you had lived during that time and if that time represents a quarter of your investing timeline and you’re investing horizon of your life, or it’s a 20 percent of it and you got zero for a decade for 20 percent of your whole investing timeline.

Ryan Isaac: You know, assuming it’s 10 years out of 50 of investing timeline, like that’s significantly bad. You know, that’s like almost not recoverable to a certain point. So had you lived through that time, you would probably have some different perspective, but it’s, it’s hard to like make someone have perspective.

Ryan Isaac: So those are the questions we’re kind of asking today around how to build a portfolio, why international diversification matters, the timing of returns from around the world. What home country bias is one of the most egregious places for home country bias, is Australia. I think from the latest data I saw is something like 75 percent of.

Ryan Isaac: Or Australians hold about 75 percent of their portfolio in Australian companies when they only represent 3 percent of the world, you know So this happens all over the world. It’s the thing we all go through but those are the themes and the questions Rabih, how do you want to outline this and where do you want to start?

Rabih Dimachki: Yeah, I want to start with home country bias and recency bias because our situation in the U. S. is very

Ryan Isaac: It’s unique.

Rabih Dimachki: work in the same direction. You’re like, I live in the U. S. I would want to have a bigger exposure to the U. S. in my portfolio. That’s the home country bias. Then do you look at the last 10 years?

Rabih Dimachki: It’s like, Oh, the U. S. has been the best performer.

Matt Mulcock: Or beyond, right? It’s 15 years, right, I think, the U. S.

Rabih Dimachki: Yeah. 15 years. So you look at that. I’m like, Oh, I have two reasons to be more in the U S

Rabih Dimachki: Whereas an investor in Sweden or Australia, et cetera, et cetera. They might have a home bias because we’ll go into the reasons why it’s very natural. So from that perspective, uh, it’s for a us investor to be convinced that, Hey, stick to a globally diversified portfolio in the long run, it’s better for you.

Ryan Isaac: And it’s totally understandable. Yeah. It makes total sense.

Rabih Dimachki: To define what a home country bias is, the name says it and there are reasons for why it happens.

Rabih Dimachki: It’s just not investors woke up one day and it’s like, you know what? I love my country

Ryan Isaac: Yeah. It’s not patriotism full on.

Rabih Dimachki: and I think the reason for this actually is one of those residual stuff that Have stayed with us since the markets evolved Let’s go back 30 40 years ago If you wanted to invest in a company outside the u.

Rabih Dimachki: It was such a hassle to do so

Ryan Isaac: Do logistically.

Rabih Dimachki: So much logistically, you have to convert your currencies. You have to go find an exchange in another country

Rabih Dimachki: Whether it allows you, as a na, a national of a different country to invest in there, you have to deal about hefty transaction costs.

Rabih Dimachki: Yeah. You had to worry about political risk in countries where the internet was not there and you don’t really know what’s happening in another country. And you had to worry about, you know, the currency aspect because how will that affect me as an American consumer if the British pound is fluctuating a lot of barriers, which.

Rabih Dimachki: back in the days just made it easier to just stay invested in your country from those logistic reasons. And given that globalization didn’t really take a strong hold and not all countries were growing with the global economy.

Rabih Dimachki: It made sense back then. But this is just a residual idea that we need to, you know, keep in the past, in a sense.

Rabih Dimachki: Right now, if you want to invest, you have access to

Rabih Dimachki: An exchange that’s open 24 7. If the U. S. stock market is closed, Japan is open. If Japan is closed, Europe is open. You always have access. Companies are usually listed on more than one exchange at the same time. Like Apple is listed on the New York stock exchange.

Rabih Dimachki: It’s also listed in Europe. It’s also listed in Japan. You can trade it anywhere. You always have access to that stock. So all of these factors take away these impediments that we’re thinking of and narrow it down to why do you still have home country bias? Just because you’re familiar with it.

Ryan Isaac: Yeah, familiarity.

Rabih Dimachki: Better investor?

Ryan Isaac: So it’s a natural thing to feel. People around the world feel it. And, specifically in the United States, we have a little bit of evidence to support it even. and it’s not, I guess it’s not as egregious. If someone allocates 80 percent of their portfolio to the U.

Ryan Isaac: Being a U. S. citizen and the U. S. represents 60 percent of the world, you know, it’s like, okay, that’s not crazy.

Matt Mulcock: That’s what I was going to

Ryan Isaac: It’s not like Australia.

Matt Mulcock: You mentioned Australia.

Matt Mulcock: impact they have on the economy, the global

Matt Mulcock: economy, versus the U. S. is so small.

Ryan Isaac: Allocate 70, 80 percent as an Australian, yeah, you’re like way over the mark

Matt Mulcock: Your point, the U. S. now accounts for 60%. So, like you said, if you’re 80, even 90%, it’s

Ryan Isaac: You’re still hedging a bet that during your exact specific investing timeline of when you’ll have money in and take it out and put money in. That the U. S. will outperform that extra piece that you’re allocating to will outperform anything else that you could own at the time. That’s still a bet. Yeah.

Ryan Isaac: You’re still like increasing risk. I think we’ll talk like, I want to hear about that kind of mathematically too,

Rabih Dimachki: You guys alluded to something very interesting, which is

Matt Mulcock: Look at us!

Ryan Isaac: All right.

Matt Mulcock: We alluded to something interesting.

Rabih Dimachki: Very interesting, which is the idea of what’s your baseline. What’s your benchmark? none investors would think of it. Oh, I’m an American. This means my portfolio starts with 100 percent U. S. And if I want to diversify, I drift away from

Rabih Dimachki: That or for an Australian, they’ll start with a hundred percent Australian stocks and they’ll, they’ll drift away by adding, but this is not the appropriate benchmark.

Rabih Dimachki: This is not where you should all start. This has been, you know, what the industry runs on. You take the global allocation across all countries. You’ll look at the size of the U S stock market. You’ll look at the size of the Chinese stock market, et cetera, et cetera. And you see. If you combine them together as if they are one market, what proportion is each country?

Rabih Dimachki: And that is the weight that you start with. And currently, the U. S. is 60 percent of the world. Developed countries ex U. S. are around 30,

Rabih Dimachki: And what remains goes to that is the baseline that you start from. And then you drift away from it by adding your own country or not adding

Ryan Isaac: I ask you some questions there when you say, this is the baseline that you begin, this is where you should begin. Who’s coming up with this? I think these are questions clients wonder too.

Ryan Isaac: It’s like, is that Ryan, are you just saying that? Or is that like something Dentist advisors is saying? Where does this like theory or foundational way to think about it? Where, where does that come from?

Rabih Dimachki: It actually started by how we create indices to start with I’ll give you a very small example on the US And then this actually extrapolates.

Rabih Dimachki: It’s the same idea in the US We have the Dow Jones and the S& P 500 right the Dow Jones has only 30 stocks in it And it has a whack weighting and then you’ve got the S& P 500 and it has a weighting that corresponds to how big a company Is it has a bigger weighting with the Dow Jones like the company that has a bigger stock price Just the price has a bigger weighting, which is

Matt Mulcock: Weird has nothing to do with the size of the company.

Ryan Isaac: It has nothing to do with the size of the

Rabih Dimachki: So, for a decent amount of time until like the first index fund was created, people did not know what’s the proper weighting, but as we accumulated more data and we saw

Ryan Isaac: Accumulated more data and we saw fast performance History. If you

Rabih Dimachki: history, and you looked at it, it’s like, Oh, The most optimal portfolio, the most efficient portfolio is one that properly mimics the representations that happen in the market.

Rabih Dimachki: Because if we want to give the market credit that it has information, it knows what’s best because it’s averaging the opinions of

Ryan Isaac: Yeah. The millions of market participants are smarter than me. The one,

Rabih Dimachki: Exactly what the market as a collective sum of investors came to, Two at the end of the day is that the most efficient best performing is the one that Already has lots of votes, which means the bigger company Taking a bigger portion in your portfolio. So as we acquired this Collective wisdom as an investment community, and we try to expand towards other asset classes or regions, which was whether it was a certain economic hub or a country, we applied the same rhetoric and it showed when you I’m talking about modern portfolio theory over here that this is the efficient portfolio.

Rabih Dimachki: Trying to weight your portfolio in a different way is not as efficient. Your risk reward ratio will be lower and it’s not better for the long

Ryan Isaac: Risk reward ratio will be lower and it’s not better for the long run. Efficient is referring to like the mathematical scientific piece that shows like the exact, balance between risk and return and trying to maximize the most amount of return you can get while minimizing risk and finding that kind of like sweet spot, that balance.

Ryan Isaac: That’s the, those are like, that’s the math

Rabih Dimachki: It’s a study

Ryan Isaac: Not some study one day. Yeah. it’s time and millions of people actively buying and selling all day long

Rabih Dimachki: All those decisions are based on certain convictions that the US’s economy has the capacity to keep expanding. The US’s economy is still the leader of creating new technologies that will drive the global economy further.

Rabih Dimachki: They have You know, political aspects, legal aspects to, and their position in the global world economy that allows them to handle recessions better than other countries. These ideas factored into trades and translated into trades ended up creating the U. S. stock market that is 60 percent of the global

Matt Mulcock: I mean, a huge factor there is the stability, not truly not getting political here, but the, the stability of the government

Ryan Isaac: The country and the market itself. And the economy

Ryan Isaac: Itself. exactly Yeah.

Matt Mulcock: The  private property rights, like everything we have in the U. S.

Rabih Dimachki: it’s a fertile ground to create. Yes.

Rabih Dimachki: A a thriving

Ryan Isaac: That’s what got us, that’s what got it to 60 in the first place.

Ryan Isaac: So someone just kind of approaching the concept of diversification, which I know it makes sense to people to not be overly concentrated in things, but if someone’s just approaching that. They would understand it by just thinking if I want over long periods of time, not 12 months, not five years, but decades, I want to maximize my returns.

Ryan Isaac: I want to capture the returns of this global market while minimizing my risk of over concentration as much as I can. That’s where diversification comes in and in these, in building a portfolio and these ratios and how they exist in the world.

Rabih Dimachki: Yes, because it’s so interesting and it’s a very simple thought experiment. Do you know whether the U S stock market is going to be the best performing stock market next

Rabih Dimachki: year?

Rabih Dimachki: Will it be the next, will it still be in a good shape in five years? We still don’t

Rabih Dimachki: know.

Rabih Dimachki: The longer you go, you’d be like, no, I have a higher confidence that the U S stock market is going to do better on a 30 year period. I know the U S stock market is going to be doing better. Like that, that is the idea.

Rabih Dimachki: But on the short term, you do not. With the economy, you know that, and this is the difference between the stock market and the economy. With the economy, well, you know that the US economy is going to be strong next year and you know it’s going to be strong in five years from now. But 30 years from now when the demographics change, when you’ve had so many opportunities for a legal landscape to change, when you’ve had I don’t know, politics drifting in the wrong

Matt Mulcock: 30 years, a long

Rabih Dimachki: Are you sure that in 30 years from now, the U. S. economy, not the stock market, will be in a good shape

Ryan Isaac: and that other countries won’t have evolved to a point where they.

Ryan Isaac: They’ve outpaced you or they’ve, they’ve gotten to the point where they’re, they have stability, predictability, liquidity, access to funds.

Ryan Isaac: Like what grew the, what grew our markets to 60 percent of the world. How do we know that in decades other parts of the world won’t have that kind of stability and confidence and growth to match it or mimic it? Yeah. We don’t know that. It’s impossible to know.

Rabih Dimachki: So just like, because you know that the stock market on a long run converges to its long term average returns, you can’t predict the day to day or year to year. So you hold it for a longer period of time. You do the same thing with countries. You do not put all your money in one country just because on the longer term horizon, The dynamics might change and you just don’t want to be out of the picture.

Rabih Dimachki: There was a study a couple of years ago that I, I listened to on a podcast. I can’t remember

Ryan Isaac: We probably listen to different podcasts than

Matt Mulcock: I think a little bit

Ryan Isaac: different.

Rabih Dimachki: little bit different, but it was discussing what happened to investors in countries like Austria and Germany and Czechoslovakia, which is no longer a country after they ended the second world war and they do not have a stock market

Rabih Dimachki: anymore.

Rabih Dimachki: Those people like Nazi Germany as a stock market. as an economy was thriving. They had tanks. They had a strong

Rabih Dimachki: Industrial complex. you were thinking purely from an economic perspective, it’s like I would want to harness the technological growth happening in that part of the world. It would make you money, but just simply because the economy itself, the country itself lost.

Rabih Dimachki: That impacted the returns. So global diversification isn’t just a bet on which country is the best country. Global diversification is a bet on, not losing your money when a country

Matt Mulcock: Your money when a country is defeated. It a hit and it was,

Rabih Dimachki: Took a hit and it was, with the Russia, it was, The stock market got impacted, but Russia’s economy didn’t really depend much on stock markets as much as bond market, and bonds are more related to the government. But in the most recent example, the Russian Ukraine war, what happened, Russia as a country still exists, the Russian stock market still functions, but due to sanctions and stuff, global investors cannot access Russian, Exchanges and Russian stocks as a function of that, it’s the equivalent of Russia disappearing from your global investment landscape or universe.

Rabih Dimachki: And Russia as an investment disappeared and whoever had a big allocation to it just had to write it off. Whereas in a globally diversified portfolio, I remember it was like 0. 32 of our portfolio, 0. 32 percent of our portfolio. It’s like, it’s a normal day if Russia disappears from a globally diversified perspective.

Matt Mulcock: I have a question on this. which I think, I think it’s reasonable to say. when someone says, okay, we advocate for international diversification, exposing our growth assets to other countries. But with the globalized world we live in now, maybe more globalized than ever, what do you say or what’s the rationale behind someone saying, all right, Apple, yeah, it resides in the U.S., but is it really a U. S. company? It’s really a global company.

Matt Mulcock: NVIDIA, like

Ryan Isaac: people used to say that about Coca-Cola, like Coca-Cola is all over the

Matt Mulcock: Like,

Matt Mulcock: The S& P 500 consists of the largest companies in the U S which really means they’re the largest companies in the world with their tentacles, like in all, all over the world. So what would you say, what is your response to someone who says,

Ryan Isaac: That’s diversification

Matt Mulcock: We’re

Matt Mulcock: Globally diversified because the U.S. is so global now. companies are in the U. S. Like think about like, again, Apple, like what is, what’s the response to that? Of aren’t I already globally diversified because these large companies are so global?

Rabih Dimachki: It’s so interesting that you said that because this is called the revenue argument. The revenue argument is that the companies in the S& P 500, 50 percent of their revenue comes outside the U.S. They should, this means that they are diversified. However, revenue fluctuation is only one source of risk. You’ve got legal, government, consumer base. All of these stuff are different.

Rabih Dimachki: So I’ll give you a very simple example. Those technology companies, trying social media companies in general, trying to operate in Europe, the European Union had to impose different regulations on them regarding data protection.

Rabih Dimachki: If you ever take a trip to Europe and you try to open Google and try to search something, you’ll get that pop up. track me, reject all the cookies. We don’t even have the reject all cookies option in the U.S. but it’s there in Europe. Those are stuff that although social media companies in the U S are following European, U.

Rabih Dimachki: S. law, trying to do business in those other countries, impose them to, work under the restrictions,

Rabih Dimachki: restrictions of that European nation. So, while revenue is a point of risk that you diversify away from, and the argument that revenue diversification is there, there are more important

Ryan Isaac: risks Currency,

Rabih Dimachki: That affect revenue.

Rabih Dimachki: Like if Apple stopped making revenue in China, no one would care. But if China decided to change the regulations, Apple’s revenue would be impacted. So there is priorities in these numbers of risks that you look at. And number one is usually the political legal. Then comes the market opportunity.

Rabih Dimachki: Then comes the risk of the competitors. Then the risk of your own balance sheet. They come in a different set of priorities and Simply just looking at revenues means that you’re missing the bigger picture on what global diversification should be about. There’s

Ryan Isaac: That made me think of how many, Probably food companies deal with that, U. S. based food companies that do international business. Like, the, the law, like, you know, here we have the FDA. There’s so many things, ingredients in foods that are allowed in the United States that are just straight up banned as Poison in like Europe,

Rabih Dimachki: Different country.

Rabih Dimachki: It’s

Ryan Isaac: Yeah.

Ryan Isaac: Chocolate. Yeah. . But Right. It’s like they have to make their products completely different because there’s a different, like food regulating body in a different country that varies from country to country. And so that’s such a good, I’m glad you asked. That’s such a good point

Matt Mulcock: Yeah. I mean, I’ve, I’ve been asked that before. I think the other thing that I’ve, what I’ve responded, and we can fact check this with Rabih. Rabih can tell me if I get this wrong. One of my responses to this is, you went into far more detail than I did, one of my responses to is the base assumption you’re making. If you let’s, I’ll even agree to that. Let’s say I agree. I concede that point and say, okay, Apple is a global, really resides in the U S but it’s a global company now.

Matt Mulcock: Okay. But what you’re doing by just saying, I’m going to own the S and P is you’re making the assumption. That no other country is ever going to have any innovative technology or company that comes out of anywhere that the next Apple, would you want to be an Apple now, or do you want to be in the next Apple before it becomes Apple?

Matt Mulcock: You’re assuming. that there’s no other countries with no other people that are trying to innovate and build these companies. I would rather have some exposure to those and assuming and just saying like, I’m making an assumption. I don’t know where the next big company is going But there’s a good chance it’s not in the US.

Matt Mulcock: It’s a good chance. There’s a lot of other countries are doing that. I wanted to expose myself to that. So

Ryan Isaac: Exactly. The

Matt Mulcock: The globalization

Matt Mulcock: of the world means and the impact of America. The influence America has on these other countries is why I want to own these other companies in these

Matt Mulcock: other countries

Ryan Isaac: is not one of these other companies

Ryan Isaac: in these other countries. If anything, you’re looking at market Again, Rabih telling him wrong. But

Matt Mulcock: If anything, if you’re looking at market cycles again, Rabih, tell me if I’m wrong, but if anything, we are at more risk now based on the run we’ve had over the last 15 years, just based on cycles of markets,

Ryan Isaac: when something’s due to happen. Yeah. Since it hasn’t for so long.

Matt Mulcock: like you look back, like the lost decade actually led to the growth we have now and the boom we’ve had

Matt Mulcock: now

Ryan Isaac: if you average that whole period, right, then it becomes, yeah, more normalized. Yeah. Yeah. It makes sense that the U S would have so much over output performance at some point to make up for that.

Rabih Dimachki: and part of the reason why the last decade happens and because money starts flowing out and more money follows it out. If there is no, remember we were in a period where there’s no alternative to equities back when interest rates were zero.

Rabih Dimachki: The global economy is not in such a position if there is always an alternative to the U.

Rabih Dimachki: S. so once money starts leaving out of the U. S. simply because earnings are bad or economic policy is not favorable for business or margins are you know being squeezed and now it’s It’s a better opportunity to put your money elsewhere. Money will flow out because there is an alternative. You think of the automotive industry, you think of Europe, right?

Rabih Dimachki: Think of chip manufacturing, which is the future. You think of Taiwan and Southeast Asia, right?

Rabih Dimachki: There are industries outside. Where money can flow into and money has a hurting behavior. So once money starts flowing out, it goes out. And this is why it’s no surprise that during the last decade, when the U. S.

Rabih Dimachki: lost 0. 2 percent per year annually over the last 10 10 years,

Rabih Dimachki: China was having a 12. 4 percent annualized return over that decade Simply because money actually flew Money circulates around the world If you do not want to join that circulation You might be staying in a spot when it’s doing really well And staying in the same spot when it’s doing really bad

Matt Mulcock: Yeah, it’s so sorry. It’s so funny that you’re, and again, it’s reasonable, but you’ve got a client right now saying, why, and I have the same thing. Why don’t we just own the s and p 500? ’cause they’re looking back over that this

Matt Mulcock: 10,

Matt Mulcock: 15 year period, but the same. Questions, but on the opposite side, we’re coming in in 2010.

Matt Mulcock: Why would I ever own anything in the U. S.?

Ryan Isaac: Why don’t we own more international? Yeah, in the 2010s, it’s like, why do we own so much U. S.? And it’s like, well, that’s because it’s represented that way. At that time, it was like 50 percent of the world.

Matt Mulcock: And guess what we’d be saying in 2010. We’d be saying

Matt Mulcock: my response would be the same thing I’m saying now with internationalists. There’s

Matt Mulcock: more opportunity now in the U. S. because of the lost decade. There’s more opportunity now in international stocks because the U. S. has dominated internationally.

Matt Mulcock: So like now is the opportunity. This is why you are investing in the, in the, in international stocks. I always tell people the name of the game is accumulating shares.

Matt Mulcock: That’s what this is about is how many shares can I accumulate in these companies all over the world? And when you have. Areas of the market that are depressed, you’re buying more shares. You’re buying

Matt Mulcock: them cheaper.

Ryan Isaac: yeah, it’s like, how can I just capture these awesome double digit long term returns of the global market with as like least amount of risk as I can possibly

Ryan Isaac: take. there’s a couple of things in my mind that you’re bringing up too. It’s actually one of these things.

Ryan Isaac: from a behavioral standpoint of the average dentist, the average career and investing lifetime of a dentist, how often do dentists need money out of their accounts that they weren’t expecting?

Ryan Isaac: Yeah.

Ryan Isaac: I mean, we work with 600 people. We have daily requests for money. A lot of times these aren’t things that people

Ryan Isaac: expected. So I could see someone making an argument. If they said, I’m just going to buy the S and P 500, I’m going to hold it for like 30 plus years and I’m never taking money out of this thing. I think if you hold it long enough, you’ll probably average out and you’ll probably like, you’ll be okay.

Ryan Isaac: Behaviorally dentists have ebbs and flows and cash flows in and out. And if you are catching yourself in a period of time where you are way over concentrated in something that’s severely underperforming that you could not predict, And you need money, which will happen. Then you’re, you’re kind of shooting yourself in the foot in a place that you didn’t have to be in.

Ryan Isaac: You had control over not being overly concentrated. So from a behavioral standpoint,

Rabih Dimachki: It’s not prudent.

Ryan Isaac: it’s not prudent. Like diversification lowers the risk of you not having like enough as much money as you could have had, by being overly

Matt Mulcock: I’m I’m actually glad you brought this up, because we want to emphasize, I think sometimes people confuse our approach to investing as, The Bogleheads, the Vanguard, just like, just buy the S& P and sit on it.

Matt Mulcock: We, we are saying, if you’re, compared to what, right? Compared to what? If you’re saying, do that versus go out and, day trade? Yes, S& P

Matt Mulcock: will

Ryan Isaac: Please. Yeah. For a lot of things, people do just buy s and p and sit on it for 30 years,

Matt Mulcock: please.

Matt Mulcock: but we’re also saying, That is not the optimal thing to do.

Matt Mulcock: We don’t believe in just pure indexing. We’ve talked about this, a passive philosophy with a, what

Rabih Dimachki: is it?

Rabih Dimachki: Active implementation. Active

Matt Mulcock: An active implementation. There is a middle ground. There is a more thoughtful way to do this that we think can optimize your risk and return, balance. And we’re saying that sitting on the S and P 500 sounds great in theory.

Matt Mulcock: we don’t think it’s the optimal

Ryan Isaac: thing

Ryan Isaac: to do. Well, and this is a whole other discussion, but there’s the assumption that holding the S& P 500 is the exposure to all of your highest performing, Have Possible potential companies is also a huge misconception.

Ryan Isaac: You’re, you’re ignoring gigantic chunks of chunks of the market that will over time outperform the S and P 500. So that’s a whole other thing that just that assumption alone is, is rooted in just some misunderstanding and probably just lack of education too, that that’s also not everything. Like you’re, even if you did that and held it for 30 years, you’re still missing out by not holding a broader, section of the market, even in the United States.

Ryan Isaac: But that’s a whole other

Rabih Dimachki: Yeah. 100 100 percent there.

Rabih Dimachki: Yeah, 100%. That’s part two. And even, let’s say, you know what, I’ll give it to you. S& P 500 is going to do the best thing for the next 30 years. This is the best investment. we know that it’s going to be the best

Rabih Dimachki: investment

Rabih Dimachki: I’m talking hypotheticals here. Let’s assume that we all agree that in 30 years from now, the best investment you’ll ever going to be in is the S& P 500. For a dentist, and this is the active implementation part, it’s not like fancy words, would I still put that client in an S& P 500? No.

Rabih Dimachki: Because, while we know, under this hypothetical scenario, that the S& P 500 for sure is the best investment, I need a guarantee from the dentist that their life will not change for

Rabih Dimachki: 30 years. If they can also promise and guarantee that they will not touch this money for 30 years, it’s not the real world.

Ryan Isaac: promise that they will not touch this money for 30 years. It’s a no brainer. When countries have their big moments and their bust moments, give us

Ryan Isaac: some,

Matt Mulcock: and how it’s not predictable.

Ryan Isaac: give us some

Ryan Isaac: insight

Rabih Dimachki: got you some data guys. And this is related to the last decade. I have 20 years of data from 2000 to 2019. And we’re talking about international diversification over here.

Rabih Dimachki: So I got the equity returns of developed markets. So we are talking European Union. We’re

Rabih Dimachki: talking Australia. No, we’re talking Canada, Japan,

Ryan Isaac: Japan. US included. So I asked the

Rabih Dimachki: U. S. included. So I added the U. S. in the, in this, chunk I just took the top five performing countries during those 20 years. Like what were

Rabih Dimachki: the top five

Rabih Dimachki: in each?

Rabih Dimachki: Yes.

Rabih Dimachki: so it has the last decade and it has the bull market where the U. S. killed it. Okay. Out of a guess, you have 20 years. How many of the years was the U. S. in

Ryan Isaac: in the

Ryan Isaac: top

Ryan Isaac: five?

Ryan Isaac: In the top five mm. Okay. I’m going to say

Ryan Isaac: three

Ryan Isaac: years.

Rabih Dimachki: Okay.

Matt Mulcock: How

Matt Mulcock: many years of 20 of those

Matt Mulcock: from 2000 to 2020 was the US in the top five? My first instinct was to say 10 or

Ryan Isaac: plus.

Ryan Isaac: Yeah. Like gut instinct’s like

Rabih Dimachki: has the bull market.

Matt Mulcock: that’s what I’m saying is the way you’re presenting this.

Matt Mulcock: I think, you know, that I want to say, we want to

Matt Mulcock: say

Matt Mulcock: more. I want to say at least half, but I’m now I’m like,

Matt Mulcock: well,

Matt Mulcock: probably more like three.

Ryan Isaac: Yeah.

Matt Mulcock: My gut instinct was

Matt Mulcock: to say 10.

Rabih Dimachki: Six.

Ryan Isaac: Oh my gosh. Okay. But no one would say

Rabih Dimachki: that right.

Rabih Dimachki: In the decade from 2000, 2010, the US was in the top five only one year, and it was the year of 2008 where it only dropped 37%

Ryan Isaac: That was, its his top

Matt Mulcock: It was like the

Ryan Isaac: 37. worst

Ryan Isaac: losers,

Rabih Dimachki: exactly.

Rabih Dimachki: And from 2010 till 2019, it’s the other five times. But from 2010, 2019, which is the bull market where

Rabih Dimachki: the s and p 500 times. Half of those times it

Rabih Dimachki: in the top five. Only

Rabih Dimachki: half the

Rabih Dimachki: time it

Ryan Isaac: it

Ryan Isaac: the top number one?

Rabih Dimachki: This is my question to

Ryan Isaac: Oh,

Matt Mulcock: Well, it’s only top five six times.

Rabih Dimachki: But remember, the s and p made 16.5% annualized return during that

Rabih Dimachki: It was only five times out of ten in the top five. How many times it was

Rabih Dimachki: the

Matt Mulcock: It Now I’m going to say like 1.

Ryan Isaac: 2.

Ryan Isaac: 1 time. In

Ryan Isaac: 20 years was the US the top performing

Matt Mulcock: in 20

Ryan Isaac: the world. In 20

Rabih Dimachki: i’m just gonna read them really quick

Rabih Dimachki: who was the top performer

Matt Mulcock: Just, just number one. Yeah, yeah,

Matt Mulcock: yeah.

Rabih Dimachki: Switzerland, New Zealand, New Zealand, Sweden, Austria, Canada, Spain, Finland, Japan, Norway, Sweden, Ireland, Belgium, Finland, we got to 2013, no U. S. yet, 2014, U. S. A., then Denmark,

Rabih Dimachki: Canada, Austria, Finland, New Zealand.

Matt Mulcock: Finland And

Ryan Isaac: Sweden.

Ryan Isaac: And Sweden.

Ryan Isaac: Okay.

Ryan Isaac: Yeah. so if you were going to place a bet just based on the last 20 years, you, the US wouldn’t even be in your. Top. You’d be like Finland, Sweden, New Zealand,

Ryan Isaac: Norway.

Ryan Isaac: Do

Ryan Isaac: you know what I mean? Like that shows the psychological bias that exists. That’s why it’s called the home country bias that exists and then how recency bias stacks on top of That’s crazy.

Matt Mulcock: Only six in the top five. Top five.

Matt Mulcock: That’s why

Matt Mulcock: only

Matt Mulcock: one at the top for

Ryan Isaac: And it’s 60 percent of the world’s economy of the world’s stock market.

Ryan Isaac: And it only was number one, once top performing one time.

Rabih Dimachki: Because year over year performance is not an indicator of an economy strength. It’s not an indicator of the health of financial markets.

Rabih Dimachki: It’s just money flow from one institution to another from one investor to another of different interests. It will not reflect the true magnitude and value of the stock market until long term returns are priced

Ryan Isaac: Yeah, so if you’re a dentist again, going back to the everyday life of the behavioral experience for a dentist and you have different amounts of money coming in. You have different amounts of money coming out at different timings. You have completely unpredictable events in your life where you will need money.

Ryan Isaac: I mean, dentists need money so much more frequently than I ever thought they would.

Matt Mulcock: Oh, for every,

Ryan Isaac: often it’s like unplanned. It happens so much in a dentist career

Matt Mulcock: because that’s life,

Ryan Isaac: because that is life. And the life of a dentist is even way more complex with so many moving pieces, so many opportunities all the time and things that can go wrong

Ryan Isaac: because of that.

Ryan Isaac: The best thing that you can do. To get the highest possible return, like maximize your chances to get the highest possible returns while not having to predict anything is to own a diversified portfolio. And all of the data, this isn’t just like our cool opinion. It’s like, this is what all of the data, the history, the science and the collective. Yeah. And the collective world of millions of people in this experience, buying and selling these things has arrived at these conclusions. Like this is the baseline of how to build a portfolio. If you stray from that. Fine, but you are now, you are now making a bet that you know something different than the other millions of market participants in history and data and academia and hopefully that works out for you.

Ryan Isaac: I got my, I want my clients to be successful if they do that.

Matt Mulcock: This makes me think, and I won’t name any names, but there is a prominent person in the dental space, who, was talking, I think, really about us and then kind of grouping us with like traditional advisors and was disparaging the idea of diversification, and what this person said was

Matt Mulcock: It was so funny, because a client called me and said that this person said this, on like a private call and said, don’t listen to anyone who talks about diversification.

Matt Mulcock: That is them admitting that they don’t know what’s going to happen. And my response

Matt Mulcock: was, yeah,

Matt Mulcock: that is the point

Matt Mulcock: is we are.

Matt Mulcock: As opposed to

Matt Mulcock: saying, we know what’s going to happen. It was

Matt Mulcock: just, it was so interesting that they, this per and this happens all the

Ryan Isaac: Yeah. They’re like, haha, got you. Diversification means you don’t know what’s going on or what’s going to

Matt Mulcock: yeah, the whole point of this is having the humility, trusting the data, trusting the science behind it and saying, I don’t know what’s going to happen. All I can do that’s the point of investing is I’m accepting the uncertainty of what is going to happen and trying to spread my assets as much as I possibly can with the optimism of knowing what I do know is that as long as the economy and markets are still going and people are still waking up every day, trying to better their lives, this is going to keep growing.

Matt Mulcock: That’s the only thing I do know.

Ryan Isaac: Yep.

Rabih Dimachki: Actually, it’s for the client’s best interest that we say that we do not know what’s going to happen because

Ryan Isaac: well, the worst things happen when financial people say they know what’s gonna happen. That’s the most,

Matt Mulcock: That’s

Ryan Isaac: that is the most predatory environment. When financial people say, I know what’s gonna happen.

Ryan Isaac: Buy this thing. Yep. That’s when the worst stuff happens.

Rabih Dimachki: when do you expect me to do proper risk management when I know What’s gonna happen or when i’m completely clueless and i’m on the hot wire? When do you expect me to really take care of your money and make sure that if you’re losing money, it’s not because of a mistake we’re doing, but just because of the natural fluctuations

Ryan Isaac: yeah.

Matt Mulcock: economies.

Ryan Isaac: yeah.

Ryan Isaac: And I would, I would love to fall and we’ve done this before, but it would be fun to follow this up soon of, that’s just international diversification. When someone, again, we were talking about this earlier when someone says I’ll just buy the S and P 500 We’re still ignoring a giant piece even inside the United

Ryan Isaac: States of it inside of each of these countries of how diverse returns are based on size of company and the price of their stock and sectors like there’s still that still doesn’t cover you even if you are 100 percent in your country.

Ryan Isaac: That in the United States and you’re an S& P 500 investor, that still doesn’t cover you fully diversified in your own country, let alone the whole world. So that’d be a good followup. But was there anything else on your list of home country bias, diversification, the science, the math behind it? I feel like we really kind of dove into that really well.

Ryan Isaac: Was there anything else on your

Rabih Dimachki: into that really well. Was there anything else on your list? If you look at evidence based investing in the U. S. where, yes, don’t just buy the S& P 500 because it’s 70 percent of the U.

Rabih Dimachki: S., make sure you have small cap, make sure you have value. All of these, you know, insights that were gathered from the science apply Elsewhere in the world. this is for another podcast, but I know there’s an argument against value in the U. S. just simply because growth companies and tech

Rabih Dimachki: companies have been doing well.

Rabih Dimachki: But value and small cap have been as premiums have been showing up international and international markets and emerging markets. So there are more opportunities if you expose yourself to international and emerging, markets that Might not

Rabih Dimachki: be available right now in the U. S. due to the, you know, economic landscape.

Ryan Isaac: Yeah, geez. Yeah, that’s that’s so much. That would be a good follow up.

Ryan Isaac: It teased that. So, I mean, again, to normalize it, this is a common question. Like every time a

Ryan Isaac: certain, yeah, every time in, like you said, in the, in the two thousands, anytime a certain asset class goes on a higher than average run for an extended period of time, the question is always, why don’t we just own that in 2021. Crypto was going bonkers. There was so much pressure. Like, why don’t we own more of this stuff? Why aren’t we doing this? It’s because that’s just how we’re wired to behave as humans. Like this recency bias. But so this is a very common, very rational question, but what you just said, Rabih, the phrase evidence based investing, that’s all we’re trying to do.

Ryan Isaac: We don’t know the future. That’s why

Matt Mulcock: Spoiler alert, we don’t know.

Ryan Isaac: Yeah. So anyway, that was really good. Thanks, Matt. Anything else you want to

Matt Mulcock: I’m give Rabih the last word, but here’s what I’ll say. the biggest takeaway from any of this stuff, because we covered a lot, I think we’ve got technical, hopefully not too much, to me, there’s only two secrets of investing. Truly. There’s only two secrets and they’re open secrets. Diversification, proper diversification. Those

Ryan Isaac: Yeah. And time. Those are

Matt Mulcock: are the only two things that you actually can control, that will lead to

Matt Mulcock: success, that you absolutely know will lead

Matt Mulcock: to

Matt Mulcock: success. Or ruin you I think the last point on the time aspect is, understand the difference between your career span, your span of human capital. You like using your human capital versus your investing timeline. Your investing timeline is a lot longer. Then you think you think let’s say you’re 40 years old and you’re like, Oh, I’m going to retire at 55.

Matt Mulcock: So that’s my investing timeline. No, you’re investing timeline at 40 years old is most likely another 45 years, hopefully 50 years. So again, the time aspect is critical to understand how long are you actually investing? So if you’re sitting, you’re thinking, why aren’t we just in the S and P 500?

Matt Mulcock: That’s killed last 10 years. It’s like you’re investing for the next 50 and you’re assuming. That the U. S. is going to keep doing what it’s doing for the next 50 years. Maybe it is, but there’s a good chance it’s not.

Ryan Isaac: Yeah. Love it. I’ll say it’s something. two things come to mind as you’re talking about that, Matt.

Ryan Isaac: One is I think most of us do this. I think dentists do this a lot. they just have such complex lives. They underestimate the amount of things that will come up in their life that require money from them and how often that happens. It’s been interesting to watch. So don’t try not to underestimate how often, you’re going to need money.

Ryan Isaac: and then number two is what you’re just saying. Your investing life is very long. There will always be something that is getting our attention as like an outperforming asset class. There will always be something and our human nature will always be to just look at the recency of that and feel like that is now the future that is now the permanent thing.

Ryan Isaac: And why aren’t we, why aren’t we chasing that? But that’s exactly what baits the average investor into low returns is to chasing what is recently performing. That is like the most classic cliche thing that investors do that people that ruin their returns. So awesome. Thank you, Rabih. Last, any last

Ryan Isaac: thoughts?

Rabih Dimachki: honestly, like you guys alluded to, because I don’t think an investor can afford not being diversified. I know with being diversified, you will look at this.

Rabih Dimachki: These, There will portfolio. There’s always something you hate in your portfolio. There’s always that really good performer that

Rabih Dimachki: you wish

Rabih Dimachki: you had

Rabih Dimachki: a little bit more of.

Rabih Dimachki: You’ll have to deal with these, but on the flip side, if you’re not diversified, you’ll have to make decisions on entry, decisions on exits,

Ryan Isaac: predicting

Rabih Dimachki: who’s the best winner

Matt Mulcock: and

Matt Mulcock: you’re not gonna

Ryan Isaac: win.

Ryan Isaac: and how long to hold

Rabih Dimachki: Exactly. And if we know anything about historical performance of active traders, is that they underperform.

Rabih Dimachki: So

Ryan Isaac: Okay.

Rabih Dimachki: why sweat?

Ryan Isaac: if you have any questions about your portfolio, we obviously like talking about this. So, dentistsadvisors. com click the yellow button schedule a consultation friendly chat with a dental specific advisor. And, thanks for listening. Thanks guys. And

Ryan Isaac: catch you next

Keywords: biases, home country bias, investing, diversification

Behavioral Finance, Finance 101, Getting Organized