American investor and business leader John Bogle once said of investing, “Do not look for the needle in the haystack, just buy the haystack.”
What he meant was, do not focus on one single investment, and rather create a well-diversified portfolio that includes varied investment types and spans many industries and geographical areas.
The benefit of this diversification is that, if certain investments fall in value, those losses might be offset by gains elsewhere. As a result, the overall value of your portfolio could remain more stable.
Yet, if you were to focus all your efforts on “finding the needle” and that investment experiences a period of volatility, it could mean that your entire portfolio significantly falls in value. This could make it more difficult to achieve your financial goals.
Many investors fail to diversify effectively because they suffer from “home bias”, concentrating too heavily on investments in their own country or region.
Read on to learn why you might fall victim to home bias and how you could diversify your portfolio.
UK equities only made up 4% of the global index in 2023
If you concentrate a disproportionately large share of your investments in local assets, you can be said to suffer from home bias. As a UK investor, this may be more likely than you realise.
Indeed, in April 2023, Barclays reported that UK investors hold an estimated 25% of their portfolio in local assets. In comparison, UK equities only made up 4% of the global index.
If your investments are similarly distributed, you may adopt more risk because if the UK market experiences a period of volatility, this could disproportionately affect your entire portfolio.
Additionally, in a well-diversified portfolio, gains from overseas markets could offset losses in the UK. Yet, if you suffer from home bias, you might not have this protection.
That is why it is important to avoid home bias, but this can be challenging.
Local assets are recognisable and may seem “safer” for investors
Educating yourself is important when investing. If you put your wealth into investment types or industries that you do not understand, it may be more difficult to balance risk and make measured decisions.
However, this need to understand investments is also a key reason why you might suffer from home bias. You likely recognise and may use many of the businesses in the UK, and so you could feel more comfortable investing in UK markets.
Conversely, when you invest overseas, you may not have heard of most of the companies you are buying shares in. You may also lack knowledge about cultural trends or political issues that could affect the value of your investments.
As such, you might feel that UK investments are “safer” because you understand them better, and so you may decide to concentrate more of your portfolio in local assets.
You may also avoid foreign investments due to higher transaction costs or lack of availability through your current investment account.
3 factors to consider when diversifying your investment portfolio
If you are concerned about home bias, you may want to adjust your investment portfolio. By spreading your wealth across different geographical areas and industries, and exploring various investment types, you could improve the diversification of your portfolio and potentially reduce risk.
However, there are certain factors to consider when trying to balance your portfolio.
1. Be aware of concentration risk
Investing in markets around the globe may help you diversify your portfolio, but it is important to consider concentration risk.
This is when a small number of stocks have a disproportionate effect on the overall value of the market.
For example, according to Visual Capitalist, US equities made up 42.5% of global markets in the second quarter of 2023. As such, you might believe that concentrating investments in the US could give you a relatively well-diversified portfolio.
However, in July 2024, Nasdaq reported that the “Magnificent Seven” (a group of large tech companies including Apple, Microsoft, and Amazon) made up 35% of the S&P 500.
While these figures may change as markets fluctuate, the data suggests that investing in US markets could overexpose you to the tech industry. This may not be a problem currently while tech companies are reporting significant growth. Yet, if the industry experiences a period of volatility in the future, you could see disproportionate losses.
That is why you may want to consider the dominant industries in each of the countries you invest in. This ensures you can spread your wealth evenly and if certain types of companies experience losses, gains from other areas of the economy may stabilise the value of your portfolio.
2. Take advantage of emerging markets
Many of the most valuable stocks come from developed countries such as the US or the UK. You may want to invest in established business in developed economies, as they could be relatively stable and offer sustained growth over time.
However, if you want to diversify your portfolio, you may want to consider emerging markets too, as they may grow considerably in the future.
For example, Nasdaq reports that the nominal GDP of India was $3.76 trillion in 2023. By 2028, this is projected to rise to $5.57 trillion, making India the third-largest economy in the world.
Investing in these emerging markets could help you diversify your portfolio and benefit from growth as economies expand. It could also offer some protection as global economic trends change and certain developed countries lose a portion of their market share.
3. Seek professional advice
Creating an investment portfolio that distributes wealth across different products, industries, and geographical areas can be challenging. Any mistakes could make it more difficult to generate the necessary growth to achieve your financial goals.
That is why you may want to seek professional advice. We can explore different investment options and perform due diligence to create a portfolio that aligns with your goals and attitude to risk.
Get in touch
If you are concerned about home bias in your investment portfolio, 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.
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.
