/Is your Portfolio suffering from Home Country Bias?

Is your Portfolio suffering from Home Country Bias?

Oftentimes, traders have been found to prefer trading within their local markets. This is quite unsurprising, as we all are more comfortable when investing our hard-earned money in companies and markets that we know and understand, rather than in a foreign market that we do not know much about. This misguided preference for local securities and shares has been found to be more prevalent with Australians than with other populations in the world over. However, by trading exclusively in our local markets we forget that we are actually only investing in a meagre percentage of the world’s capital market. This prevents us from taking advantage of the impossible number of great opportunities and better returns that would come with investing in more vibrant foreign markets around the world.

The aim behind investment, and the key to the very elusive financial security is diversification. This means leveraging various income sources so as to maintain your average income month after month, year after year. Diversification is a risk management tactic. By seeking different income sources that are not interdependent, losses by one source can be cushioned by profits gleaned from other income sources. This is because the chances of all your income sources crashing at the same time decreases as you increase their diversity.

However, how diverse can your income get if you only invest in a market that accounts for less than 3% of the global capital market share, and whose securities listing is lead mainly by the financial and materials industry? Even long-time local traders, for the most part, have barely scratched the surface when you think about it globally. About 66% of the average Australian investor’s portfolio consists of Australian stocks. This means most local traders are losing out on about 97% of the world’s capital market share, for the most part.

So why aren’t Australian investors keen on taking advantage of the ocean of opportunities found in foreign markets?

Well, trading internationally has, until recently, been an overwhelmingly expensive venture. Brokers would charge highly for the service and therefore, very few traders had access to foreign markets. In addition to that, trading international stocks was always viewed as difficult, as most traders were not well-versed in the prevailing factors that could and would affect stock trends in foreign markets. These have contributed largely to the reluctance of Australian traders to trade in offshore securities.

However, in this era of the internet and worldwide connectivity, the world has become a global village. Information about prevailing circumstances in other regions in the world is readily available with a quick Google search. This allows for foreign traders to make prudent decisions regarding trades in lands that are, in reality, half a globe away.

The knowledge of foreign markets and the factors that affect them, however, is not only relevant to people trading in foreign markets. This knowledge can help traders understand global economics as well their own local market better. They can thus make better informed decision when trading locally too. Also, with regards to the cost of international trading, the rise of online trading has caused the costs of brokerage services to drop to a fraction of what they once were. Brokers have been making their prices more and more competitive, if only to catch the wave of increasing traders who are interested in offshore stock trading.

Worth noting as well, the Australian economy is an advanced one. This implies that the rate of growth is slowing and thus the potential income that one can glean from this market is dwindling. There are, however, young and virile markets such as China and Southeast Asia, which are only just beginning to bloom. These markets are driven by more current industries such tech-oriented companies which gives them a lot of room for potential growth in coming years. This is unlike the Australian market which is mainly driven by financial and mining industries. Though in these industries have experienced a boom in the region in the past decade, they are now slowing down as the global economy shifts and enters a new phase. This is all the more reason as to why traders should be moving towards more vibrant international markets that hold the promise of better returns.

At the end of the day, the point of fighting our innate home country bias is to further diversify our income sources and thus cushion us from falls in each of the individual sectors that we choose to invest in as well as compound our potential earning exponential. Do not let the comfort of home country bias stop you from realising your dreams as trader.