Ask a British investor what they own and the answer often includes a lot of British companies. Ask an American and you will hear about American ones. This tendency to hold more of your own country’s market than a global portfolio would suggest is called home bias. It is one of the most common habits in investing, and it can quietly shape how a portfolio behaves when markets get rough.
What home bias is
Home bias is the tendency for investors to put a larger share of their money into domestic shares and bonds than those markets’ weight in the world would justify. The UK stock market makes up only a small single-digit percentage of global stock market value, yet many UK investors hold far more than that in UK companies. The US, by contrast, accounts for well over half of global stock market value.
Why it happens
There are understandable reasons. People feel more comfortable with companies they know and can see on the high street. Domestic shares avoid currency risk, because a UK investor’s spending is in pounds. Some tax wrappers, pension rules and dividend preferences can also nudge investors towards home markets. And news coverage naturally focuses on local companies.
Why it matters
Home bias concentrates risk. A portfolio heavily tilted to one country depends on that country’s economy, currency and politics, and on the mix of sectors in its stock market. The FTSE 100, for example, is weighted towards banks, energy, mining, healthcare and consumer staples, with relatively little in technology. The US market is dominated by large technology companies.
That means home bias can help or hurt depending on what leads the market. During years when US technology soared, investors with heavy UK home bias missed out. When US technology sells off sharply, a UK-heavy portfolio may be partly sheltered. Neither outcome comes from skill. It comes from the shape of the portfolio.
A simple example
Suppose two investors each have £100,000. One holds 80 per cent in UK shares and 20 per cent overseas. The other holds a global tracker, roughly in line with world market weights, so most of the money sits in US shares. If US technology shares fall 10 per cent in a week while UK banks and oil companies hold steady, the first investor may barely notice. If US technology rallies strongly for a year, the second investor will likely be well ahead.
How traders think about it
For traders, home bias is a reminder to understand what drives the markets you trade. The FTSE 100 earns much of its revenue overseas and often moves differently from the UK economy. Knowing the sector mix of each index helps explain why London can be calm while Wall Street sells off, or the reverse.
Common mistakes
A common mistake is assuming home bias is always wrong. Some tilt towards home can make sense for currency and income reasons. Another is overcorrecting by piling into whatever overseas market has done best recently. A third is not realising that a global tracker is itself heavily concentrated in a handful of large US companies.
The bottom line
Home bias is the habit of holding more of your own country’s market than its global weight suggests. It reduces currency risk and feels familiar, but it concentrates exposure to one economy and one mix of sectors, which can help or hurt depending on what leads. For a related idea, read our guide to the Magnificent Seven. If you want to test how well you understand your own risk, try the free Samuel & Co Trading Trader Assessment.
