Investing: The Case for Leaving Home
While it’s true that there’s no place like home, when it comes to investing there are costs involved in being too chained to your own patch.
Australians and New Zealanders, like investors everywhere, tend to have a home bias in their portfolios. And there can be rational reasons for this in the tax advantages of dividend imputation or merely their familiarity with local stocks.
However, too large a home bias may have undesirable consequences, in leaving investors with concentrated exposures to individual companies and sectors and in turn missing out on the opportunities from exposure to sectors not well represented in the local market. The concentration trade-off in Australia is magnified by the large market share of a handful of companies.
Highlighting the degree of potentially lost opportunity, stocks of the roughly 18,000 companies trading outside Australia represent about 98% of the world’s more than $120 trillion equity market.
Yet, it is not uncommon for some local investors to have a 50% allocation to Australia. In other words, half of their equity portfolios are in a market that represents just 2% of the global market. In the case of New Zealand investors with a similar home bias, the concentration is even more pronounced.
To put this in context, a portfolio with a 50% allocation to Australia has just five stocks (BHP Billiton, CSL and three of the big four banks) holding a weight roughly equivalent to all the stocks outside of Australia and the US. Just to be clear, this means that just five stocks in such a portfolio will have more weight than 46 markets with more than 15,500 companies!
When Australians and New Zealanders invest outside their home markets, they can capture equity returns from thousands of companies around the globe and potentially offset weak performance in one market with stronger returns elsewhere. In other words, holding a globally diversified portfolio positions investors to capture returns wherever they occur.
Hitting Home: The Impact of Home Bias
Preference for domestic equities comes at a cost to global diversification
Past performance is not a guarantee of future results.
This article originally appeared in Short N Sweet, a newsletter for Dimensional clients.
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