As a professional rugby player, you will know all about the benefits of home advantage.

Playing in front of your (hopefully raucous) home crowd in conditions you are used to can often mean you feel like you are a try up before the match even kicks off.

Likewise, you will always treasure away wins, as you can often feel that you are playing against the ground conditions and the crowd just as much as the 15 opponents on the pitch.

However, when it comes to investing your pension fund and other savings, the idea of home advantage, commonly known in this respect as “home bias”, does not carry such positive connotations. Find out why, and what you can do about it.

Putting all your investment eggs in a single basket could mean taking on more risk

The phenomenon of home bias refers to the tendency individuals can have to favour investing in companies in their home market over the stocks of foreign companies.

It is an inevitable outcome of feeling comfortable investing in businesses you recognise, which tend to be based in your own country, and it can affect investors all over the world.

If you are in the UK, the names and activities of businesses based here will understandably be in front of you on a daily basis. As a result, you might be tempted to invest a substantial proportion of your savings and pension fund in those companies.

However, putting all your investment eggs in one basket can end up costing you money, and reducing the value of your wealth in the long term.

One of the key reasons for this is that the UK market has recently lagged behind other stock markets around the world, particularly since the global pandemic in 2020/21.

If you look at this table, the selection of different national indexes here have risen substantially between the floor of the market when the pandemic broke out on 20 March 2020 and now:

Source: Google.com, performance of various market indexes from 20 March 2020 to 4 July 2024. *As of 19 March 2020. Figures rounded to the nearest whole number. Past performance is not a reliable indicator of future performance.

While your home market, represented here by the FTSE 100, has ostensibly produced healthy growth of nearly 60%, it has been far outperformed by other markets.

Indeed, other indexes, such as Germany, Japan and the US have all more than doubled in total capitalisation in that time.

Past performance does not necessarily indicate future performance, and this is a relatively small time frame to consider when investing your wealth. Even so, the figures demonstrate that even if your home market is on the up, markets elsewhere can be demonstrating better performance.

Not only that, but the UK market makes up just 4% of total global investments. So, even if the FTSE 100 was delivering higher returns, your investment exposure would be limited to a very small corner of the market.

Meanwhile, by diversifying your investments across a range of countries and geographic regions, you may be able to mitigate the risk of poor investment performance in one region by enjoying better returns from others.

It is potentially dangerous to rely on a single market sector

As well as avoiding investing in just one particular region, you also need to consider the different market sectors, such as commodities, consumer goods, and information technology.

For example, you may have read publicity recently about the “Magnificent Seven”. These are a group of massive technology companies in the US, including household names you will encounter on a day-to-day basis such as Microsoft, Apple, and Amazon.

These seven companies have been so successful recently that a report in the Guardian revealed their proportion of the global market to be the equivalent size of the combined economies of Canada, France, China, Japan, and the UK.

Their collective value more than doubled in 2023, which has encouraged investors to invest in those stocks. According to a Fidelity report, some investment trust funds have in excess of 20% of their holdings in just these seven companies, with one having close to 60% invested.

However, just putting all your eggs in this particular basket can expose you to a significant amount of risk.

A report from Temple Bar Investment Trust points out some lessons from history, such as the market crash in the early 1970s and the dot-com bubble in 2000. This shows that an over-focus on a certain market sector can result in you incurring big losses if stock values in that sector fall. These losses could be exacerbated if you have overpaid for those stocks in the first place.

The importance of a diversified portfolio

This chart provides a great visual representation of the potential dangers of not diversifying your investments across different market sectors.

Published at the end of 2022, it shows eight of the key investment market sectors, and their comparative year-on-year performance over the previous 12 years:

Source: Royal London

As with the data about various indices, past performance is not necessarily an indicator of future performance. Even so, this chart  demonstrates how difficult it can be to select top-performing sectors each year.

For example, the orange blocks signify commodities markets. Just by following those across the chart, you will see dramatic year-on-year fluctuation. Emerging market stocks, coloured red, have been on a similar journey in the same time frame.

To appreciate the importance of diversifying your investments, you just need to look at the dark purple blocks. These signify the multi-asset sector which, as the name suggests, includes investments from all of the sectors set out here.

Over the dozen years, these have provided a level of consistency that shows the potential power of diversification.

Your investment strategy will be individual to you

While it is tempting to invest exclusively at home or follow investment trends such as the Magnificent Seven, it is important to take a diversified approach when it comes to your investment choices. It can be sensible to avoid restricting your opportunities for growth through an over-concentration in any particular market or sector.

Remember that there is no one-size-fits-all solution to how you should put your portfolio together. Your strategy will depend on your personal financial goals and how much investment risk you are prepared to accept to meet those targets.

Get in touch

If you would like to talk about your investment strategy, or any other aspects of your financial planning, then please do get in touch with us at DBL Asset Management.

Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

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. Past performance is not a reliable indicator of future performance.

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