In his Spring Budget, Conservative chancellor Jeremy Hunt announced a consultation on the introduction of a new UK or British ISA. According to the Telegraph, Labour backed this investment initiative and had “no plans” to drop it.
This ISA would give you an additional £5,000 on top of the current £20,000 annual ISA allowance, to invest in UK shares.
If you think this sounds like an appealing proposition, you’re not alone. According to research published in IFA Magazine, almost half of UK adults are interested in opening a UK ISA if the Labour government introduces one.
However, this potential new ISA has sparked debate about “home bias” in investing. That is, concentrating all your investments in UK equities.
This lack of diversification could increase your exposure to risk, which can occur if your portfolio is too heavily weighted in one particular geographic region or sector – if the economy in your home country experiences a downturn, the value of your entire portfolio could fall.
In contrast, investing in a range of overseas markets, sectors, and asset classes could help you effectively balance risk in your portfolio.
Read on to learn more about home bias and find out what steps you could take to avoid it hampering your progress towards your investment goals.
Home bias could increase your exposure to risk when investing
If you hold a disproportionate amount of domestic assets compared to their share in the global market, home bias could be affecting your investment portfolio.
Indeed, FTAdviser has reported that 25% of the average balanced model portfolio is made up of UK investments – even though the UK only accounts for 3% of global GDP and 4% of global equity and bond markets.
What’s more, the UK may have an inherent “concentration risk” as the largest 10 companies account for 42% of the total market capitalisation. This could mean that if you invest in a UK fund, you’re relying on a handful of companies to perform well.
So, if you’ve focused solely or disproportionately on domestic investments, a dip in the UK economy – which is likely to affect businesses in the country – could negatively affect the value of your entire portfolio.
Reasons why home bias remains pervasive among UK investors
You might intentionally favour UK markets because this feels like your “comfort zone”. FTSE 100 companies, such as Marks & Spencer and Sainsbury’s, may feel more familiar and “safe” than those that feature in foreign stock markets.
On the other hand, you may be unaware of the influence home bias could be having on your portfolio. If you don’t monitor and review your investments routinely, changes in global markets – such as the reduction in the size of the UK market in recent years – could lead to unintentional home bias.
Whatever the reason, if you put all your eggs in one basket by primarily investing in domestic shares, the value of your portfolio could fall if the UK economy struggles.
So, eradicating home bias may help you balance risk more effectively.
Building a diversified portfolio could lead to greater investment returns
Diversifying your portfolio, by investing across global markets and different sectors using various asset classes, could not only help you balance risk but may also lead to greater returns.
While diversification involves more than geographical variances, adding international stocks and shares to your portfolio allows you to access growth opportunities you might have missed out on by limiting your investments to a single region.
Indeed, an analysis of data from the past 20 years conducted by Fidelity and reported by FTAdviser has shown the comparative returns of a globalised and UK-centric approach. Investing £10,000 in a diversified global portfolio returned £43,276 compared to only £37,980 when using a portfolio containing 40% UK funds – a difference of over £5,000.
3 ways to avoid home bias in investing
1. Invest in various markets around the globe
Diversifying your portfolio by investing in a range of asset classes in different geographical locations could allow you to balance risk and increase the potential for higher returns.
Indeed, spreading your wealth between various markets around the globe could help limit losses in your portfolio. For example, if the UK market slows, a buoyant US market could allow you to offset your losses against your gains – if you hold shares in both markets.
2. Drill down into the funds you hold
Investment funds usually contain a variety of equities so they may seem like a useful way to diversify and spread the risk in your portfolio. But it’s always worth a closer look.
Indeed, some funds may not be as diversified as you might think they are. As mentioned above, UK funds are often made up of a handful of large companies. However, drilling down into the composition of funds isn’t always simple. So, you might benefit from consulting a financial planner who can help you review your investments and avoid both concentration risk and home bias.
3. Seek advice from a financial professional
As can be seen from the above, assessing funds, building a diversified portfolio, and balancing risk could be complicated.
So, you might benefit from speaking to a financial planner who can help you build an investment portfolio that aligns with your goals and appetite for risk. They can also help you avoid emotion-based decisions, such as favouring domestic equities and unintentionally allowing your portfolio to potentially suffer from home bias.
Get in touch
If you’d like to learn more about how to build a diversified investment portfolio that balances risk effectively, we can help. Please email hello@bluewealth.co.uk or call us on 0117 332 0230.
Please note
The content of this newsletter is offered only for general informational and educational purposes. It is not offered as, and does not constitute, financial advice.
Blue Wealth Ltd is not responsible for the accuracy of the information contained within linked sites.
Blue Wealth Ltd is an appointed representative of Best Practice IFA Group Ltd, which is authorised and regulated by the Financial Conduct Authority.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
