Who is Internationally Diversified? Evidence from 296 401(K)

Abstract

We examine the international equity allocations of over 3 million individuals in 296 401(k) plans over the 2006-2011 period. These allocations show enormous cross-individual variation, ranging between zero and over 75%, as well as an upward trend that is only partially accounted for by the slight decrease in importance of the US market relative to the world market. International equity allocations also display strong cohort effects, with younger cohorts investing more internationally than older ones, but also each cohort investing more internationally over time. This finding suggests that the home bias phenomenon may slowly disappear over time. Worker’s salary has a positive effect on international allocations, while account balance has a negative one, but these effects are not economically large. Education, financial literacy and the fraction of foreign-born population measured at the zip code level have strong positive effects on international diversification, consistent with familiarity and information stories. In addition, states with more exports have higher international allocations.