Home bias and the hidden risks of not diversifying abroad

It’s well known that UK investors tend to overweight their portfolios with stocks from their home country. It’s a pattern of behaviour you find all over the world. To varying degrees, investors everywhere are prone to ‘home bias’ because of the unfamiliar nature of foreign markets. But while international investing comes with uncertainties, staying local risks having a much more concentrated portfolio than you might think.

Since the mid-1990s, there’s been a notable decline in home bias. In that time, globalisation and the internet have radically improved knowledge and access to foreign markets. But according to the IMF, British investors still only allocate around half of their equity portfolios to international stocks.

On paper, that level of concentration in the home market makes little sense. After all, the UK stock market only accounts for around 8-9% of global market capitalisation. So in theory, if you wanted a fully diversified world folio, just over 90% of it would be made up of foreign stocks.In reality though, most investors would find that kind of international weighting absurd. On one hand, it’s often argued that there’s ample opportunity to buy UK-quoted stocks with exposure to foreign markets. For...