How much to hold in your own country

Investors in every country hold substantially more of their own market than its share of global markets would suggest, which is one of the most consistent findings in the field.

The scale of it

Documented across markets.

Studies of portfolio holdings find domestic allocations far in excess of the country's weight in global indices, in every country examined.

Which means investors in small markets are extremely concentrated relative to a global benchmark, and investors in large markets are less so simply because their market is large.

The pattern is consistent enough to be considered a behavioural regularity rather than a series of independent judgements.

Why it happens

Several explanations, none sufficient alone.

Familiarity: domestic companies are known, which produces a sense of understanding that may not correspond to information.

Information asymmetry, which was once substantial and has narrowed considerably.

Currency: domestic assets match domestic liabilities, which is a genuine argument.

Tax treatment favouring domestic holdings in some systems.

Cost, historically higher for foreign investment and now largely eliminated.

Default options in pension schemes, which frequently carry a domestic tilt.

And patriotism, which appears in surveys and is not a financial argument.

The arguments that have merit

Taken seriously.

Currency matching: someone whose spending is in one currency has a genuine reason to hold assets in it, particularly for money needed sooner.

Tax: some systems provide relief on domestic dividends that is unavailable on foreign ones.

And, for investors in very large, broadly diversified markets, a domestic tilt is less costly in diversification terms than for investors in small concentrated ones.

The cost of concentration

What is given up.

Single-country risk: political, regulatory, demographic and economic factors specific to one country.

Sector concentration, since national markets are frequently dominated by a few industries — resource-heavy in some countries, financial in others, technology in others.

Which means a national index is a bet on a particular economic structure rather than a diversified holding.

The historical record includes national markets that performed poorly for very long periods and, in extreme cases, ceased to exist.

Which is the strongest argument for global diversification: it protects against the outcome that no forecast anticipates.

Currency risk

Which cuts both ways.

Holding foreign equities introduces currency exposure, which adds volatility in the short term.

Over long periods, currency movements have historically had less effect on equity returns than the equity returns themselves, and currency exposure provides some diversification of its own.

Hedging currency risk on equities is available and adds cost and complexity, and the evidence does not strongly favour it for long-horizon equity holdings.

For bonds the position is different: currency movement can dominate the return, which is why bond holdings are more commonly hedged.

A reasonable approach

What many practitioners suggest.

Start from global market weights as a neutral position, which requires no forecast.

Apply a domestic tilt if there is a specific reason — currency matching for money needed sooner, or a tax advantage.

Keep the tilt modest and deliberate rather than accidental.

And check what you actually hold, since many people discover a substantial home bias they did not choose, arising from default funds and legacy holdings.

Emerging markets

A related question.

Emerging markets represent a meaningful share of global market capitalisation and a larger share of global economic output.

They carry additional political, governance and currency risk, and have historically been more volatile.

Global all-country indices include them at market weight, which is a defensible neutral position.

Excluding them entirely is a decision, and one worth making consciously rather than by using a developed-markets index without noticing.

Checking your own position

Practical.

Look through your funds to the underlying geographic exposure, which requires reading the factsheets rather than the fund names.

Include pensions, which are frequently the largest holding and frequently in a default fund with a domestic tilt.

Include employer shares, which concentrate exposure to a single company in the same economy that pays your salary.

And include property, since a home is a large, undiversified, domestic, illiquid asset that most people do not count in their allocation and which materially increases home bias.

General information only, not investment advice. Investments can fall in value and past performance does not indicate future returns. Consult a regulated financial adviser.