Home bias

The tendency to hold a far larger share of domestic assets than the size of that market would suggest, because they are familiar and easy to follow.

Example

An investor whose salary, home, pension and share portfolio are all in one country holds a single economy in four forms, not a diversified portfolio.

Important

The issue is never whether the domestic market is good. It is that your income and property are usually already staked on that economy, so the investment account compounds an exposure rather than adding one.

Related terms

• Asset allocation — The split of capital across broad asset types - equities, bonds, property, cash - expressed as target percentages. The decision that sits above choosing individual holdings.
• Concentration risk — The risk that a large share of your wealth depends on a single outcome - one company, sector, property, currency, employer or counterparty.
• Diversification — Holding enough genuinely different assets that no single outcome decides your result. It reduces risk specific to individual holdings; it does not reduce the risk they all share.

Lessons that explain it

• Asset allocation: the decision above the holdings — How much you hold in each broad type of asset shapes your experience far more than which particular items you choose inside them - and it is the decision most people spend the least time on. (14 min)
• Manage the currency risk you already have; think hard before adding more — For most investors, currencies belong in portfolio thinking as a risk to manage, not a market to trade. Leveraged currency trading has no natural place in a long-term plan. (8 min)
• Stage, sector and geography: where the spread is real — Portfolios are usually spread along the dimensions that are easy to label rather than the ones that determine whether two holdings fall together. This lesson is about telling the two apart. (11 min)

All 578 terms in the Investing glossary