Why you should say no to “Home Bias”

In recent years, there has been a wave of local sentiment in Hong Kong, with many consumers embracing local brands. The heroine of our story, Cissy, is one of them. Whether it is groceries or household items, she prefers and gives extra credit to those that are locally produced. Outside of the consumer market, there is a similar situation in the investment world. This is called “Home Bias” — this means that investors tend to prefer their home markets when making investment decisions. This mindset can lead to excessive concentration in single markets, which not only increases risks, but also results in opportunities being missed elsewhere.

Cissy is one of the investors with this “Home Bias” mindset. She is familiar with the local market, where information is easily accessible and highly transparent. Since she knows less about overseas markets, and feels that the entry requirements are too high, she tends to invest in the local market, where she feels like she is on firmer ground.

Too much concentration in the local market isn’t always wise

While Cissy’s “Home Bias” is understandable, it is not always the best investment strategy. Generally speaking, effective asset management requires proper allocation among different investment vehicles and regions to balance the long-term risks and rewards of investing.

If Cissy’s investments are overly concentrated in a single market or industry, large fluctuations in that market or sector could greatly increase investment risk and portfolio volatility, as well as affecting returns. As the saying goes, “Don’t put all your eggs in one basket”,diversified investment can reduce the impact of single market disadvantages on your portfolio and help you grasp potential opportunities in different regions and industries.

Considering correlations when choosing your basket

When choosing different baskets (markets/sectors) in which to place eggs (assets), Cissy also must consider the degree of correlation. For example, China and Hong Kong are closely linked, which means the risk diversification may not have significant effects. To diversify more effectively, it is preferred to look at different parts of the world.

In addition to markets and sectors, consider investing in different assets to achieve better asset allocation. Take the stock class, for example. Whilst expected returns usually have the potential for long-term growth, short-term volatility is high and so are the risks. As for bonds and currencies, performance is relatively stable, but the expected average return is lower than that of stocks. Therefore, investors should invest in different markets, sectors and asset classes according to their objectives and risk tolerance.

If Cissy is only familiar with the local market, the threshold for overseas investment may be lowered through reliable and convenient financial solutions, and she may explore different asset markets to find opportunities with higher return potential.