Why Do We Have a Home Bias When it Comes to Investing?

Take a look at your portfolio. What percentage of your portfolio is invested in Singapore-listed companies? Look a little deeper, what percentage of your portfolio is invested in Singapore-based and Singapore-listed companies? I would expect the figure to be quite high that for most people, even though the economy of Singapore is just around 0.4% of the global economy.

We tend to invest mainly in our home market even though we know that we need to have a diversified portfolio. This is called having a home bias. We are typically more comfortable in investing in our home country, and in companies that we are familiar with, compared to companies that we might have never heard before.

There are advantages and disadvantageous in having a home bias. Let’s focus on the key downside associated with having a home bias in investing.

Not Being Diversified

One main downside to having too much exposure to your own country is the risk of not being diversified. Many people would also invest more into the company they are working for if it was listed.

This means that your job, the economy of your country and your investments are all correlated. If one aspect of it hits a downturn, the rest of your livelihood would be negatively affected as well.

For example, if the economy of Singapore faces a recession, your company might have to start cutting costs or laying off some workforce. You might be directly affected as well. You might end up being jobless with a declining portfolio and living in a country in recession. All these can be extremely risky for you, especially if you have a family to take care of.

That is why it might be wise to have a more diversified portfolio. In the event that you face a job loss or are caught in an economic recession, at least your portfolio would not be directly affected.

Foolish Summary

Investing allows us to build a diversified portfolio easily. Although we are all subjected to having a home bias in our investment, we have to be aware of the risks associated with it. Thus, we can actively remind ourselves to diversify, diversify, diversify.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.