Knowledge hub

Home bias: why it’s important to be globally diversified

Back to insights

By startdig Markets and Investments

In other words, home bias is when we invest too much of our portfolios in stocks and bonds from our own countries and not enough in assets from elsewhere in the world.

Peter Westaway from Vanguard explains that the idea of home bias is that investors will systematically tend to overweight the assets.

For example, in the UK the stock market is around 8% of the global stock market.

The average holding of the UK investor is around 50% so there’s a big overweight to UK assets.

Of course, it’s not just the UK.

Investors all over the world have this preference for investing close to home. Often advisers and investors will use currency risk to justify it and so waiting to home markets is a way of avoiding currency risk.

This is a classic example of home bias, and is not always the best way.

For example, in fixed income markets it’s much easier just to buy a type of asset that’s hedged out so that you no longer expose your overseas bonds to currency fluctuations.

With equities, you could hedge that out as well, although we think having unhedged equity exposure is sometimes a benefit because it doesn’t necessarily add volatility to your portfolio.

Because sometimes a local stock market and the local currency go in the opposite direction and cancel each other out, what if you have a hunch that a country’s fortunes are about to rise or fall?

Unfortunately, it’s very difficult to profit from those sorts of events.

By the time there’s some information that becomes compelling, it becomes the consensus view and is clearly going to happen. By that point even if it turns out to be true that’s probably already priced into the market.

You’ve even lost the opportunity by then to profit from it.

It’s about being able to predict those events that nobody else can do and home bias makes this difficult.

Some people get paid a lot of money to try and do that, but the reality is on average most of those don’t deliver.

the alternative strategy to that is having a portfolio of investments that aren’t loaded up on political events or states of the world coming around.

So being aware of home bias and diversifying globally really does make sense

The information provided on this site is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different and you should seek advice from a financial planner who can consider if these strategies and products are right for you.

Ideas & insights

Knowledge Hub

Navigating Uncertainty in Share Markets

podcast

Forecasting the future | Unravelling the mysteries of market predictions and the lessons of 2008

Markets and Investments • Article

What it means to make consistently high-quality decisions

Wealth Planning • Article

These money intentions will transform your financial wellbeing

Lifestyle • Article