Home Country Bias

What should you know?

As human beings, we tend to favour what is close and familiar to us. We are naturally drawn to what we see in our day-to-day environment.

In some areas of life, this can be beneficial, but when it comes to investing, it can be potentially dangerous.

The chart below uses some select countries to demonstrate how investors tend to have a sizeable over-exposure to companies in their home country, compared to their relative weighting in the world stock market:

Several factors combine to lead to this outcome, not all are borne out of a conscious decision.

For example, pension providers and local banks will often hold a significantly overweight position in domestic assets within their investment portfolios and mutual funds. This can give you a strong home country bias that you are not even aware of.

When you consider your broader financial footprint, such as the location of property you own, the problem becomes even more acute.

Why should you care?

Diversification is a fundamental principle of successful investing. It reduces risk by allocating investments across various asset types, geographic regions, and industries.

If your wealth is excessively concentrated in a particular country, it adds uncertainty and risk to your financial planning. This is intensified if that country represents a relatively small proportion of the global stock market.

When it comes to property, it is natural that most people have a home bias and it’s difficult to alter that. However, with your financial assets, you can control where you choose to invest them.

Invest in a globally diversified portfolio that reflects the distribution of the world stock markets and human ingenuity. Doing so will lessen your home country concentration and significantly reduce the risk of capital loss.