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Avoiding common investing pitfalls – home-country bias

We explain why investing too much on home turf could be bad news for an investment portfolio.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Aaron Gibbs
Investment Writer

Published on 21 October 2022

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Human psychology plays a big role in where we choose to invest our money. We’re more likely to focus on the domestic stock market because it’s full of big-name brands we know and trust. This phenomenon is called home-country bias.

Overinvesting in your home country is rarely a recipe for success when investing. Here we look at some pros and cons to home-country bias, and why it could be holding back your investment returns.

This article isn’t personal advice. If you’re unsure if an investment is right for your circumstances, seek financial advice. All investments fall as well as rise in value, so you could get back less than you invest.

What is home-country bias?

Home-country bias is where investors have too much invested in domestic shares in their investment portfolio.

It’s a global phenomenon, mainly driven by behavioural traits – investors are more familiar and feel reassured by investing in companies in their local market that they know.

Seeing, touching, and using the products or services offered by a company can unconsciously sway your investment decisions based on your emotional connection towards them.

Home-country bias – the benefit

Minimising currency risk

Investing in the UK means your investments are valued in the same currency you spend in – pound sterling. Exchange rates shouldn’t have as much of an impact on profits and any shareholder returns. Earning in pounds becomes even more valuable if you’re approaching retirement.

Remember it’s not always possible to entirely remove currency risk investing in the UK though. Lots of big companies are multi-national and make money around the world. For example, around 70% of FTSE 100 company revenues are made overseas.

Currency hedging – what is it and why does it matter?

Home-country bias – the disadvantages

Geographies and risk

Investing in one country increases risk. How your investments are impacted by policymaking is a good example. The now-ex-chancellor’s mini-budget brought incredible volatility to the UK market. It’s clear to see how owning investments around the world could reduce your overall risk.

The table below shows different parts of the world will do better than others over different periods of time. The UK market from 30 September 2020 to 2021 was the best performing sector. A year later and it was a very different story.

Annual performance across the major sectors

Scroll across to see the full chart.

2017-18		2018-19		2019-20		2020-21		2021-22
North America	19.51%	UK Government Bonds	13.63%	North America	9.02%	UK All Companies	32.24%	North America	-1.69%
Japan	12.14%	Global Government Bonds	11.37%	Asia Pacific (ex Japan)	7.59%	North America	26.66%	Global Government Bonds	-7.78%
Global	11.8%	Global Corporate Bonds	9.56%	Global	7.38%	Global	23.85%	Global	-8.71%
UK All Companies	5.61%	UK Corporate Bonds	9.04%	UK Corporate Bonds	4.2%	Europe (ex UK)	22.43%	Asia Pacific (ex Japan)	-9.54%
Asia Pacific (ex Japan)	4.04%	Global Emerging Markets	7.3%	UK Government Bonds	4.07%	Global Emerging Markets	18.79%	Global High Yield Bonds	-10.29%
Europe (ex UK)	1.81%	Global High Yield Bonds	7.25%	Global Corporate Bonds	4.01%	Japan	17.47%	Global Corporate Bonds	-13.67%
Global High Yield Bonds	1.64%	North America	7.22%	Japan	3.84%	Asia Pacific (ex Japan)	15.22%	Global Emerging Markets	-14.16%
UK Government Bonds	0.63%	Asia Pacific (ex Japan)	6.09%	Europe (ex UK)	3.48%	Global High Yield Bonds	8.05%	Japan	-14.68%
UK Corporate Bonds	0.13%	Global	5.88%	Global Emerging Markets	2.05%	Global Corporate Bonds	1.35%	UK All Companies	-15.55%
Global Corporate Bonds	-0.34%	Europe (ex UK)	1.96	Global Government Bonds	1.81%	UK Corporate Bonds	1.26%	Europe (ex UK)	-16.64%
Global Government Bonds	-0.36%	UK All Companies	0.12%	Global High Yield Bonds	-0.47%	Global Government Bonds	-5.21%	UK Corporate Bonds	-20.73%
Global Emerging Markets	-0.76%	Japan	-1.18%	UK All Companies	-12.94%	UK Government Bonds	-7.19%	UK Government Bonds	-24.3%

Past performance isn’t a guide to the future. Source: Lipper IM from 30/09/17 to 30/09/22, IA sector performance.

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Sectors and missed opportunities

By investing too much here at home, you’re putting your eggs in very different baskets compared to the other stock markets.

As an example, the sector weights in the UK vs the US are very different.

Sector breakdown for UK market vs US market

Scroll across to see the full chart.

Source: Refinitiv Eikon, to 13/09/2022.

One in four companies in the US’s S&P 500 index are technology shares – home to powerhouses like Apple, Amazon and Microsoft. Whereas technology shares make up a very small percentage of the UK market with somewhat less exciting names.

How much should I invest where?

Comparing your own portfolio allocation to the global stock market breakdown is a good place to start. The UK makes up a tiny proportion, about 4%. You can use the breakdown to help think about the weightings in your portfolio. In doing so, you know you’re well diversified across the board.

The US market is the biggest in the world – bigger than all the other countries combined. Because of its size and variety, investing in the US could be a good way to diversify an investment portfolio.

Breakdown of the global stock market

Scroll across to see the full chart.

Source: Refinitiv Eikon, to 13/09/2022.

If you invest more in one country than their global weighting, it should be because your view is that the companies you hold will do better than those based in other countries.

The dos and don’ts of diversification

To see which geographies and sectors you could be missing, or to check any bias that might have crept into your portfolio, you can breakdown your HL account with our Portfolio Analysis Tool.

The bottom line

Investing in your home market feels safer. But thinking rationally, you could be missing out on a world of opportunity overseas.

In the past, home-country bias has been fuelled by the lack of availability to invest in overseas markets with greater barriers to entry. But this isn’t the case anymore.

We think it makes sense to diversify your portfolio by investing in other countries alongside the UK.

You can find a range of funds to help build a well-balanced and diversified portfolio on our Wealth Shortlist. A selection of funds our research team has identified as having the potential to outperform their peers over the long term.

View the Wealth Shortlist

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