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How You Are Unwittingly Damaging Your Wealth

Outside my balcony stands a tree. In the tree lives a pair of tree lizards.

I think they are the same two reptiles that were there some six years ago, when I first moved into my condo. But I can’t be absolutely certain – one lizard looks pretty much like another, to me.

I will be the first to admit that herpetology is not one of my fortes. But the two lizards seem happy enough. They spend the day scaling up and down the tree trunk, occasionally lashing out with their long tongue at insects that are stupid enough to go anywhere near them.

But the point is that the two lizards don’t venture beyond the same tree.

They probably know the tree like the back of their hands (or should that be their tiny little feet). But they don’t know much more beyond that.

Staying in your ‘hood

If they would only venture a few metres away, they would find another tree that’s full of ants and spiders. They could, then, eat to their heart’s content, and more. But they don’t. It’s either because they are comfortable in their own ‘hood, or they just don’t know any better.

We investors are a bit like that too.

We like investing in our own backyards. We prefer our own neighbourhoods. It certainly feels a lot more comfortable staying in our home market.

For instance, we are considerably more familiar with stocks on Singapore Exchange  (SGX: S68) than we are with shares that are listed Hong Kong Exchange and Clearing (SEHK: 388) or Bursa Malaysia (KLSE: 1818).

But why is that? It’s not as though information about those overseas markets isn’t readily available.

Flawed argument

It’s because we feel safer investing in what we know. It is couched in a belief that we are more likely to put our trust in brands and companies that we are familiar with. We think that local businesses will want to perform well on our behalf.

But there is a terrible flaw in that seemingly-sensible argument.

Investors in Malaysia, say, might believe that one of its domestic companies will perform well on their behalf. So, if we are invested in the same company, then we, as overseas investors, could benefit too. A company can’t selectively perform for shareholders depending on where they reside. That’s just doesn’t make sense.

Overcoming home bias

The first step to overcoming home bias is to recognise that this bias does exist in ourselves. Take a good hard look at our portfolios. Does it contain a preponderance of local stocks?

There is nothing wrong with Singapore stocks. It can be a magnet for income seekers. But the market is also just a tiny part of the global equity market.

And just as Singapore is a haven for REITs investors, Hong Kong can be a good place to look for property developers, and Malaysia can be a great market for consumer staples.

Additionally, by not diversifying our portfolios with international stocks we are doing ourselves a great disservice

That is not to mention that we are creating obvious weaknesses and inherent dangers in our unbalanced portfolio. That’s because we are ignoring the golden rule of investing – diversification.

A version of this article first appeared in Take Stock Singapore.

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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 Director David Kuo owns shares in SGX and HKEx.