It seems most people stick to the familiar, even when it comes to managing investment portfolios. The phenomenon of ‘home bias’ is well known in investment circles and refers to the need people have to invest in companies based at home rather than abroad.
This is not specific to Britain, as many other nationalities show the same sort of bias when making investment decisions. Home bias is an umbrella term used for people who invest more heavily in assets at home, even if its global stock market position implies they should look elsewhere.
Why is home bias common?
One of the simplest, and most likely, reasons for home bias is that people like things that are familiar. It’s an innate preference that sometimes overrules what could be better investment opportunities abroad.
The problem with this is obvious – long term performance has nothing to do with familiarity and being comfortable. In fact, many familiar companies and brands often see their shares slide, while brands that are unfamiliar to investors perform better.
Majority stick to UK
Investment firm Charles Schwab interviewed 200 retail investors in the UK, each of whom had access to at least £25,000 in disposable assets. Their resulting Home Bias Report found that 74% of the investors surveyed want to invest “the majority of their assets” in their domestic market. That means 3 out of 4 average investors in the retail sector don’t want to even look further afield than their home country for investment opportunities.
Interestingly, just 7% were looking to make large investments in the US market, which is not logical given than US shares have significantly outperformed the UK’s over recent years. In addition, the UK accounts for just 6% of the global stock market, while America makes up a massive 54%. Given these facts, it seems that many investors decisions don’t follow sound theory, and their innate bias towards their home market wins out.
To provide extra context, Europe (without the UK) makes up 19% of the global market, while emerging markets reach 13% and Japan 8%.
Diversification protection
So, is it wise to keep your investment eggs in one basket? The Brexit referendum is an example of how sticking to your home country can hurt your investments. Following the vote in 2016, most UK stocks tumbled (although this does exclude the largest companies that also make lots of money overseas), and sterling also fell.
An investor who had allocated a decent amount of his portfolio abroad wouldn’t have lost out under those circumstances. This is because the gains from their foreign stocks (thanks to the fall in sterling) would have wiped out the losses in UK stock.
Fast forward to 2018 and the country is still at its Brexit crossroads as we wait to see the final deal regarding trade with the EU. It makes much more sense to diversify any investment portfolio by moving some stocks abroad. This could protect the investor if sterling continues to fall and problems arise from a no deal Brexit.
UK investors clear
However, while this appears to make sense, it’s not necessarily the path UK investors will take. Around half of respondents to the survey said that they feel “most informed” about companies in their own domestic market, while 39% stick to their home country because they “understand the dynamics of their domestic economy better” than in other regions.
When it comes to Brexit, the research found that around 57% of UK investors asked think that Brexit will have a “positive long-term impact” on UK stocks. Just 59% said that they would consider diversifying and expanding into overseas markets due to Brexit.
James Turner, managing director of Turner Little Limited said: “While sticking close to home is a worldwide phenomenon for investors, it seems particularly the case in the UK. It makes sense when you consider that most of asset allocation consists of working out how to maximise any returns and keep the risk low. If investors are familiar and comfortable with their domestic market, then they’re more likely to invest in it.
“This is the case even when investment would mean lower profits and a higher trade off between risk and return than investing in foreign markets. This research shows that almost 75% of investors back UK markets, while just 7% ascribe value to investing in America. As the American stock market has outperformed the FTSE 100 for a few years now, it could be that some UK investors are weakening their own portfolios.”
About Turner Little
Founded in 1998 in Yorkshire, UK, Turner Little is a specialist UK and offshore company formation, banking and corporate services provider. Our services include company formation, UK and offshore banking, asset protection, credit correction/repair, trademarking and trusts. Other services include Internet services, mail forwarding, wills and probate. Turner Little’s vision is to offer the best possible service, together with market leading products.
