Does your investment portfolio suffer from too much ‘home bias’? It’s natural for investors to stay close to home when thinking about investing, contemplating well-known UK companies or UK-focused funds rather than looking further afield. But if your portfolio becomes too heavily concentrated in the UK, you risk missing out on valuable diversification benefits and better potential returns elsewhere.
The drawbacks of home bias
One of the biggest reasons to avoid home bias is that it limits your portfolio’s growth potential. Investing with a global perspective opens up your portfolio to a world of different countries, industries and companies to invest in, potentially leading to higher returns over time. Importantly, investing globally means you’re more likely to gain exposure to high-growth sectors or companies that are not always present in your domestic market, whereas sticking with the UK means narrowing your opportunities, even if you own some outstanding local companies.
The benefits of diversification
At the same time, home bias in a portfolio breaks one of the biggest investment rules: diversification. Spreading your portfolio across different asset classes, countries and companies is one of the simplest – yet most effective – ways to mitigate risk within your portfolio and helps you achieve more consistent returns over time. Studies and historical data show that including international investments in a portfolio can lead to better risk-adjusted returns due to diversification benefits, though geopolitical risks must be considered. Global markets offer a wider range of asset classes and reduce your vulnerability to economic downturns specific to your home country.
However, over-diversification is a risk to be wary of too! It occurs when additional investments diminish returns without lowering risk significantly. Regular reviews and rebalancing help maintain a well-diversified portfolio and manage any potential concentration risk that may occur over time. Ready to invest? Recent research suggests that some Britons are starting to save more despite the cost-of-living crisis1. Now might be the right time to start thinking about investing if you have some money on the sidelines.
1Aldermore, 2024
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.
