The hidden risk of 'home bias' investments

24 October 2019

Investors in the UK have long been known to exhibit a strong “home bias” – that is, the tendency to invest more heavily in domestic assets than global ones.

This often stems from the familiarity of investing with locally listed companies. But it overlooks the fact that most of the products we use every day are from companies right across the globe.

Home bias could also prove costly for investors because it may, in fact, carry hidden risks.

Single-nation markets lack the diversification of a global counterpart and the UK market, in particular, suffers from a high level of concentration.

In the UK, over 50% of the FTSE All-Share Index comes from just three sectors – financials, consumer goods and oil and gas. That represents a huge concentration of risk.

HomebiasAbstract

Over 50% of the FTSE All-Share Index comes from just three sectors – financials, consumer goods and oil and gas. That represents a huge concentration of risk.

Political issues such as Brexit also remind us of the dangers of restricting investment to a single market. Most damaging, though, can be the “opportunity cost” – in other words the ‘what-you’ve-been-missing’ effect – that comes with ignoring some of the world’s leading companies.

Luckily, the solution is simple. Opportunities can be increased and potential risks can be mitigated by widening the investment remit.

While investors should be aware of other risks, such as currency risk as they look beyond domestic assets, a global portfolio offers the widest of all.

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