Home-bias investing: A global phenomenon
11 September 2017 | Portfolio construction
Much attention is given to the powerful bias that many Australian investors hold for Australian investments, particularly our shares.
This home bias is, of course, not uniquely Australian. It is widely shared with investors in other developed countries including the US, UK, Canada and Japan.
American investors tend to favour American shares while Japanese investors often favour Japanese shares and so forth. Home-bias investing is truly a global phenomenon.
However, Australian investors’ strong tilt to local shares is particularly marked given that our local market accounts for such a small percentage of the global market.
Under-diversification has been described as one of the most-prevalent bad habits of investors; a critical concern because of the dominant influence that appropriate diversification has on long-term returns. And home-bias investing ranks among the biggest forms of under-diversification.
Recent Vanguard research* on home-bias investing found that:
- Australia: Australian shares accounted for just 2.4 per cent of the global share market in December 2014 yet Australians collectively held 66.5 per cent of their portfolios in Australian shares.
- Canada: Canadian shares made up 3.4 per of the global share market yet Canadians collectively held 59 per cent of their portfolios in Canadian shares.
- Japan: Japanese shares accounted for 7.2 per cent of the global share market yet Japanese investors collectively held 55.2 per cent of their share portfolios in Japanese shares.
- UK: While UK shares made up 7.2 per cent of the global share market, its investors collectively held 26.3 per cent of their portfolios in UK shares.
- US: While US shares accounted for 50.9 per cent of the global share market, American investors collectively held 79.1 per cent of their portfolios in US shares.
If investors choose to invest in the global market regardless of their home country, Australian investors would hold almost 98 per cent of their share portfolio not in Australian shares. Just think about it in regards to your own portfolio.
Investors with an excessive home bias are not adequately spreading their risks and opportunities. They are potentially paying a high price for the perceived comfort of restricting much of their investing to our home shores.
* The global case for strategic asset allocation and an examination of home bias, published by Vanguard, February 2017.
NEXT: Why investors fall into a home-bias trap.
Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.
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Robin Bowerman, Principal, Market Strategy & Communications at Vanguard Australia, shares investment and personal finance insights gained from over two decades in the finance industry as writer, commentator and editor.