Today I want to talk about Home Bias in the form of domestic investment. Whilst it seems unrelated, it is my “short” drive to the neighbouring suburb for lunch that generated this topic.
Sydney traffic can be horrendous. There’s Military road, Cleveland street, King Georges road and Parramatta road to name a few. Being on any of these roads during lunch hour on a weekend is certain to drive you crazy. Along with frequent pot holes and patched up conditions, no wonder we have the highest SUV numbers per capita in the world. You know what can make the whole driving experience worse (yes, that’s possible)? It’s when you have children strapped in their restraints, kicking and screaming non-stop for an hour on a 40 degree day. Meanwhile, at night without traffic, that trip would only take 15mins.
Whilst we sit in the car and complain, I’m sure anyone who has driven in London, Bangkok, New York or Tokyo would think driving in Sydney is not that bad.
This is home bias. The perception that everything local or domestic is either much better or much worse than everywhere else in the world.
Financially, home bias is the tendency for investors to favour domestic products despite the benefits of diversifying into foreign investments.
This bias may be due to difficulties such as legal restrictions and additional transaction costs associated with foreign investments. However, foreign investment may reduce the systemic risk to your portfolio as they are less likely affected by domestic market changes.
Next time you’re stuck in traffic, think about whether you have a home bias with your investments.
Although investing domestically may feel safe and familiar, strong preference for local investments may be detrimental to your portfolio.
Tendency to invest primarily in one location may mean you are missing out on alternative areas of substantial growth.
See the below image showing percentile of growth in various countries.