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About personal finance, investments and markets.
July 11, 2014

Avoid home-bias

Most people are familiar with the benefits of diversification of their investments („don’t put all your eggs in one basket”). But in one particular way, most investors seem dramatically underdiversified in this globalizing economy: that is, they have a disproportionate share of their investments in their own country or region, rather than diversified across the countries of the world. This isn’t just true for private investors but also for institutional investors.

Home Bias Everywhere 2 - JPM

Investors can significantly improve the risk-return profile of their portoflio by going global. The degree of home bias has not yet been explained by any good normative reason yet. Currency risk, transaction costs, better information, or capital immobility can’t actually solve this riddle. The reason is probably much simpler: institutional investors are overweight the markets they’re judged against and that has historically been their home market.

Being globally invested offers two main benefits:

  1. Better diversification (you could also say „less stress“). A global portfolio diversifies risk on a number of levels including currency, interest rates, political, credit risk and monetary policy. Even as economic circumstances may drag down one nation, global diversification decreases the risk that one geographic area alone will drag down your portfolio. For example nobody is more concerned and affected by the future of the Euro than the Europeans themselves but they have the highest exposure to assets in the Eurozone which doesn’t make sense from a risk management perspective.
  2. Capture higher growth. GDP growth in Europe has been lower than in most other regions of the world. There are many reasons, from demographics to sub-par economic and montetary policy.

The investing rules are the same whether you invest mainly at home or a broad:

  • Simple is better: you can set up a globally diversified portfolio with few products.
  • Be diversified: just because you might own a China and Brazil equity fund doesn’t mean that you are properly diversified. You have to make sure that you own a broad range of assets across a broad range of geographies.
  • Keep costs low: Focus on what you can control and fees are top of the list.
  • Think long-term: at the end of the day, the reason for going global is to improve your risk-return profile. However, especially the emerging markets have shown to have higher levels of volatility. Investors should only commit to areas outside of the home markets if they have a sufficiently long time-horizon.

We have the global background to help you build the right portfolio: We combine more than 50 years of experience in Europe, Asia and Latin America. With previously senior roles at global investment banks and asset managers in different asset classes, we have a good insight into the pros and cons of the available investment products.

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