Many investors prefer familiar UK companies and UK-centric funds, a tendency known as ‘home bias’. While this instinct is understandable, over-reliance on domestic investments can limit your portfolio’s growth potential, as well as the benefits gained by diversifying.
Pitfalls of home bias
One major drawback of home bias is its restriction on your portfolio’s growth prospects. A global investment approach exposes your portfolio to a diverse array of countries, industries and companies, which gives potential for higher returns over time. This broader perspective is essential, as it provides access to high-growth sectors and companies not always available in the UK market. By concentrating solely on UK investments, you may miss out on these lucrative opportunities, even if some local companies perform well.
The power of diversification
Home bias also contradicts a fundamental investment principle – diversification. Diversifying your portfolio across various asset classes, countries, and companies is a straightforward yet highly effective strategy to reduce risk and achieve consistent returns. Historical data and studies demonstrate that international investments enhance a portfolio’s risk-adjusted returns due to their diversification benefits. While investing globally does come with geopolitical risks, the wider range of asset classes and markets can buffer your portfolio against economic downturns specific to the UK.
However, be cautious of over-diversification, which occurs when additional investments reduce returns without significantly lowering risk. Regular reviews and rebalancing of your portfolio can help maintain optimal diversification and manage potential concentration risks over time.
Taking the next step
Recent research indicates that some Britons are beginning to save more despite the cost-of-living crisis1. If you have extra funds available, now might be an ideal time to consider expanding your investment strategy. By looking beyond the UK, you can take advantage of global opportunities that could help to build a more robust and resilient portfolio.
1Aldermore, 2024
It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.