What is home bias?
The perils of being a stay-at-home investor
Home bias is the tendency of investors to invest more heavily in domestic equities while ignoring the potential of foreign equities in a well-balanced portfolio.
On top of the phenomenon that investors naturally feel more comfortable investing in companies that they’re familiar with, the refusal to stray outside their own comfort zone is historically rooted in pre-digital times when hurdles such as language differences, legal restrictions and high cross-border transaction costs made the process very challenging.
What makes this a problem?
Although regulatory alignment and clever digital solutions mean that investors no longer face many of these difficulties, home bias persists to an extraordinary degree.
As trading has evolved, home bias has been somehow alleviated by better and faster access to foreign exchanges. However, it still remains a potential threat to the diversity and resilience of a portfolio if a trader focuses on home-market shares too heavily.
The Singapore equity market makes up less than 0.5% of the global stock markets and yet, many investors will remain within their own domain and keep more than half of their holdings in domestic equities. But in venturing beyond Singapore, there are further returns, protection - and, of course, risk - to be found.
For instance, in the first half of 2019, the S&P 500 advanced over 17%, the tech-heavy Nasdaq surged 20% and in China, the CSI 300 rose almost 29%. In the same period, the FTSE 100 in the UK only advanced around 10% and the STI rose 8%, trailing the others by quite a distance.
What to do?
Happily, this is a problem that investors can mitigate against with one tactic – diversification. So, if your investment strategy is based on a single sector, say, pharmaceuticals, read up on similar companies in other countries and the industry’s prospects more broadly. With a little practice, assets that once seemed foreign may become increasingly familiar.