Weekly Buzz: 🏠 What home bias means for your portfolio

5 minute read

There’s a big investing world out there, but most don’t wander too far from their own backyards. It’s human nature: people are naturally inclined to favour domestic assets – and shun the ones from further afield. Psychologists call it home bias, and it can have a huge impact on your portfolio.

What causes home bias?

• Risk aversion: Some might think it’s riskier to invest abroad, so they gravitate toward companies they know best.

• Regulations and transaction costs: The more complicated an investment seems, the more off-putting for some investors. Investing abroad can also involve added costs, but investment platforms (like StashAway!) have made it possible to keep these to a minimum.

• Information asymmetry: Some believe they have better access to information about companies in their home markets. But that’s not always the case: these days, stock information from most countries is online and readily available.

• Static allocations: Sometimes people do things simply because that’s the way they’ve always done it. That can leave them over or under-exposed to certain countries, assets, or sectors. It’s a situation that’s remedied by occasionally reviewing your investments. Our ERAA® investment framework keeps an eye on macroeconomic data, and adjusts our asset allocations to account for broad, long-term market cycles.

Does home bias help or hurt investing performance?

Well, that depends on where you’re based, and when. While US stocks make up about 50% of global market capitalisation (our Simply Finance below covers this), one study found that US investors were allocating about 85% of their stock portfolio to their home country.

Sure, having a home bias to the US stock market over the past few years would have gone well, but the markets are unpredictable, and that’s a lot of eggs in one basket. Let’s look at a different example.

The average balanced portfolio in the UK holds around 25% of its equity exposure in UK stocks, while the UK accounts for just 3% of global economic output and 4% of global stock markets. Overexposure here would have produced a very different outcome, with the decline in the relative size of the UK market and the fall in the value of the British pound.

As an investor, what’s the takeaway here?

In short, don’t put all your eggs in one basket. A multi-asset approach to investing in stocks, bonds, and commodities across different regions produces a more diversified portfolio and less volatile returns.

A standard approach, at both global and local market levels, is to invest proportionally according to market capitalisation. It's a simple way to get balanced global stock exposure. For an even simpler method? Consider using our General Investing portfolios, which are already diversified across countries and asset classes.

This article was written in collaboration with Finimize.

🎓 Simply Finance: Market capitalisation

Market capitalisation, or market cap, is the total value of a company's shares in the market – simply multiply the total number of the company’s shares by its share price.

Similarly, when referring to a country, market cap represents the total value of all publicly traded companies within that country's stock market.

Just like how a company's market cap shows its size relative to other companies, a country's market cap can indicate its economic strength and influence in the global market.

✨ StashAway’s Guide to Low-Risk Investing

Whether you're a seasoned investor looking to balance risk and reward, or someone who’s just starting their financial journey, 10 minutes is all you need to find out how low-risk investing can work for you.