Going Global: The Changing Pattern Of U.S. Investment Abroad
Investors typically allocate only a small share of their portfolios to foreign assets. This pattern of investment behavior, known as "Home bias," is puzzling because it causes investors to miss opportunities to diversify risks. During downturns in the U.S. economy, many domestic assets perform poorly, precisely when asset returns are most valuable. By purchasing foreign assets that are only partly affected by the U.S. business cycle, however, investors are able to hedge against adverse fluctuations in domestic income.