What is “home bias” and how could it affect you?

Leaving the comfort of “home” can often be a step too far for investors.

Indeed, as an expat, it may be tempting to just stick with what you know and invest your wealth in familiar assets from either the country of your birth or the country you are now residing in.

However, this “home bias” often means you could miss out on more diversification options and better returns.

So, keep reading to find out more about home bias, why investing in domestic equities may not always be the most suitable option, and how you can reduce your tendency towards favouring close to home investments.

Investors often choose to only invest in domestic assets

“Home bias” refers to the tendency for investors to invest in assets close to home and those they are already familiar with, rather than diversifying into the new markets.  

When investors exhibit home bias, they typically invest the majority of their portfolio in domestic shares and funds, often ignoring the potential benefits of diversifying by considering assets in other parts of the world.

Past experience means more investors stay home

Often, investors will choose to invest in domestic equities because overseas companies and sectors are less familiar to them. You may not have a basic knowledge of corporations in other jurisdictions – however successful – and, as a result, you may attach more risk to investing in such equities.

You may prefer Carrefour or Tesco shares to Walmart or Target, simply because you have shopped at their stores or are more aware of the brands.

Additionally, investors suffering from home bias will tend to use their own experiences of domestic companies to assess their investment options. Your view of Vodafone, Telefonica or Orange shares might be directly influenced by your personal experiences.

You may also be hesitant to invest in assets overseas because they are denominated in another currency. Indeed, you may choose to invest locally in order to trade in your home currency and hedge against what you see as additional uncertainty.

As we show to our clients, you can invest globally in an underlying currency relevant to you and don’t need to juggle accounts in different currencies.

Investing in domestic assets can often mean missing out on better-performing sectors

Home bias will often lead to heavy exposure to certain currencies and sectors. The implication of this is increased risk, as well as a possible drag on returns.

By overly concentrating on one region, you could miss out on sectors that play a role in economic growth across the globe.

For example, the technology sector is one of the largest segments of the US market, eclipsing both the financial and industrial sectors. As such, it has been an attractive opportunity for investors seeking returns – but if you’re only investing locally you may not be taking advantage of these opportunities.

So, if you are exhibiting home bias by primarily investing in assets in the Netherlands or France, for instance, you may be missing out on a myriad of investment opportunities around the world.

In fact, as the graph below shows, the relative proportion of equities and funds in the main European markets is small compared to the US and some other countries.

Source: Barclays

3 tips to reduce your home bias

If you’re looking to reduce your tendency to choose domestic assets, here are three quick tips.

1. Understand the weighting you have to your home country

If you think you’re too heavily invested at “home”, start by looking at all the domestic assets you hold compared to those held elsewhere.

Once you know the weighting that you have to your home country, compare it to that country’s share of the world stock market. This will let you see if the share is out of proportion.

As the pie chart above highlights, UK equities account for just 4% of all global stock market assets. So, if you have predominantly invested in equities and funds in the FTSE 100, your portfolio will likely be heavily out of proportion compared to the global market.  

As a result, you could be missing out on potential returns achieved by diversifying your portfolio and investing in assets in other countries.  

2. Acknowledge your risk profile

Understanding your risk profile can be a highly effective way of reducing your home bias.

Identifying your financial circumstances and goals and how averse you are to taking risks can help ease the fear and uncertainty of investing in global markets.

If you take time to understand your risk profile, you could find it easier to confidently select foreign assets and have more opportunities to take advantage of the potential returns they could offer.

3. Diversify your global portfolio

If you’re an expat living in Europe but have solely invested in assets from the country of your birth, it could be worth initially expanding your investment portfolio to incorporate equities and assets from other jurisdictions.

According to Goldman Sachs, European assets are narrowing the gap to US equities when it comes to valuations. Indeed, in 2023, the STOXX Europe 600 Index rallied about 8% and the DAX Index of German equities rose by 14%, compared to the US S&P 500 Index’s 12% gain.

As international markets rarely move in the same direction at the same time, a period of lower returns in one region can be offset by outperformance in others.

In fact, by investing in foreign equities, you could provide yourself with some additional protection against the risk of an economic or financial downturn that solely affects your home country. Furthermore, it’s not just about shares. The same applies to other asset classes such as fixed interest-government and corporate bonds and property.

Over time, it could be worth gradually diversifying your portfolio to include assets from global markets to help you achieve better returns.

Working with a financial planner can be beneficial

If you’re looking to reduce your home bias and take advantage of the investment opportunities in other countries, speaking to a financial planner can offer real value.

At Extended Investments Limited, we can help you identify your risk profile and build a diversified portfolio that maximises your opportunities for returns.

So, contact us at info@extinvestments.com and we’ll be happy to help.

Please note

Investments carry risk. 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.