Home bias could negatively affect your investment portfolio. Here’s why
There’s nothing wrong with cheering England on at the Euros, but what if you applied your home bias to investing? Find out how home bias could affect your money.
Although the England men’s squad hasn’t won a trophy in 58 years, 40% of fans believe the Three Lions will win the Euros in 2024, according to a Goal survey.
It’s not just sport – an ongoing loyalty towards the familiar can be found in all areas of our lives. Perhaps you prefer sleeping in your own bed even if a hotel mattress might be more comfortable, or enjoy your partner’s cooking more than that of your local pub or restaurant.
All these are examples of what we call “home bias”. We are naturally drawn to what we already know – and while harmless for the most part, when it comes to investing, home bias could actually work against your financial prosperity in many cases.
Yet according to the Corporate Finance Institute (CFI), the “overwhelming majority” of people exercise home bias when they invest – and many do so without realising it.
Keep reading to learn what having home bias as an investor could mean for your money.
Home bias could overexpose your portfolio to a particular geographical location
As you read above, it’s normal to prefer familiar surroundings and ideas.
This means that as an investor, you might always lean towards UK holdings. Investing in familiar institutions could feel safe to you, whereas overseas assets may feel riskier – even if that may not be the case at all.
The crucial problem with having too much home bias is that it could overexpose you to a certain geographical location and heighten the overall risk your portfolio attracts.
According to Visual Capitalist, as of the second quarter of 2023, the UK only made up 2.9% of the global stock market. As you can see from the below table, the UK market’s total value fell behind that of the US, EU, China, Japan, and Hong Kong.
Source: Visual Capitalist
As such, only investing in UK holdings means you ignore the other 97.1% of the market and lose out on the potential returns it could offer your portfolio.
What’s more, investing with home bias means that any volatility experienced in your home country could significantly affect the value of your assets and put your capital at unnecessary risk.
For instance, the UK is anticipating its next general election, which is set to take place on 4 July 2024.
Typically, political upheaval prompts short-term market volatility. If most of your holdings are UK-based, your entire portfolio could be affected by the election (and any new policies announced afterwards).
Whereas, a geographically diversified portfolio could be exposed to less risk and ride out any market storms more easily.
2 ways to work against your home bias as an investor
While you might be aware that home bias isn’t necessarily good for your money, you may still feel nervous about branching out to other geographical locations.
Here are two ways to work against home bias.
- Remember that geographical location is just one piece of the diversification puzzle
Home bias can impose risk on your portfolio, but remember, this is only one piece of the diversification puzzle.
Indeed, if you’re diversified in terms of location but only invest in one asset class, such as bonds, you could still be putting your capital at greater risk than you thought.
So, when you’re working to eradicate home bias, or at least lessen it, it may help to take a data-driven view rather than “following your gut”.
Taking this more clinical approach to your investments might enable you to fully diversify your portfolio while taking any preconceived ideas about “good” and “bad” investments out of the equation.
- Work with a professional who can guide you through your investment journey
Ultimately, navigating the ever-changing investment landscape can be a challenge, especially if you’re a busy executive or business owner without much time to spare.
Alongside addressing your home bias, there are several other considerations to make when creating an investment portfolio, including:
- The time frame over which you want to hold your assets. For example, if you’re on the cusp of retirement, you may have a shorter-term outlook than someone who is in their early 30s.
- Your appetite for risk. Some higher-risk investments do offer the potential for greater returns, but this approach isn’t for everyone. Assessing your attitude to investing allows you to apply an appropriate amount of risk to your portfolio.
- What you want to achieve with the money you invest. All investors have a “why” behind their actions. Discovering yours could help you gear your investments towards something specific.
- Additional financial biases you may possess. Home bias is just one of several financial biases that could influence your behaviours over the long term. If you’re interested in recognising your own bias, read our previous insights on financial bias and its impact.
Working with a Kellands financial planner could put your mind at ease. Our bespoke approach to your investment goals means we’ll tailor your portfolio to your specific needs, ensuring you’re kept informed every step of the way.
Get in touch
To discuss your goals with an unbiased professional, email us at hale@kelland.co.uk, or call 0161 929 8838.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.