To avoid home country bias as an expat investor, assess how much of your overall wealth depends on your home country and diversify across countries, markets and currencies.
Include property, pensions, cash and employment income in this review, as these can increase concentration even when your investment portfolio appears diversified.
Key Takeaways
- Home country bias can concentrate an expat's wealth in one market, currency and economy.
- Property, pensions, cash and income can add significant home country concentration.
- Global diversification can reduce reliance on one market without eliminating home country assets.
- The right allocation should reflect spending needs, tax residence, currency, risk and investment goals.
My contact details are hello@adamfayed.com and WhatsApp +44-7393-450-837 if you have any questions.
The information in this article is for general guidance only. It does not constitute financial, legal, or tax advice, and is not a recommendation or solicitation to invest. Some facts may have changed since the time of writing.
What is home country bias and how does it work?
Home country bias is the tendency for investors to allocate a disproportionately large share of their portfolio to companies, funds or other investments from their own country.
The bias can occur for several reasons:
- Familiarity: Domestic companies and markets are easier to understand and follow.
- Accessibility: Domestic investments are often readily available through local investment platforms.
- Currency familiarity: Investors may prefer assets denominated in the currency they know best.
- Information availability: Local financial news and research can make domestic investments appear more transparent.
- Psychological comfort: Familiar investments can feel less risky than unfamiliar foreign markets.
Home country bias can result in a portfolio that is more concentrated than intended.
A strong familiarity with one market does not necessarily make that market less risky or provide adequate diversification.
Investors should consider whether their allocation to home country assets supports their financial goals or is driven mainly by familiarity.
5 ways to avoid home country bias as an expat investor
The most effective ways to avoid home country bias as an expat investor are to measure total home country exposure, diversify across international markets and currencies, invest according to financial objectives and rebalance as circumstances change.
Home country bias can extend well beyond the investment portfolio.
1. Measure Total Home Country Exposure
Measure total home country exposure by assessing every major asset, income source and financial interest connected to the home country, rather than looking only at stocks and investment funds.
This should include:
- Shares and investment funds
- Pension and retirement accounts
- Bank deposits and cash
- Property
- Business interests
- Government or corporate bonds
- Employment income
- Other significant assets
Property and pensions can be particularly important for expats because they may represent substantial amounts of wealth accumulated before moving abroad.
For example, an expat might believe that a portfolio containing 70% international funds is well diversified.
However, if most of their property, pension and cash remain in the home country, total economic exposure may still be heavily concentrated there.
The objective is not necessarily to eliminate this exposure but to identify how much exposure already exists before adding new investments.
2. Diversify Equity Exposure Across Countries
Spread equity investments across countries, regions and markets to reduce reliance on the home country stock market.
International and global equity exposure can reduce dependence on the economic performance of a single country.
Expats can consider investments across developed and emerging markets, different regions and a range of sectors, selecting them on their investment merits.
However, geographic diversification should not be treated as a box-ticking exercise.
Holding several funds does not necessarily create meaningful diversification if those funds have substantial exposure to the same markets, sectors or companies.
The aim is to build an equity portfolio that captures opportunities worldwide and reduces dependence on familiar domestic markets.
3. Consider Currency Exposure Separately
Consider currency exposure separately from geographic exposure because the currency in which an investment is traded does not necessarily represent the currencies of its underlying assets.
For example, a fund can be denominated and traded in US dollars while holding companies from countries across Europe, Asia and other regions.
The trading currency does not automatically determine the underlying economic exposure.
Expats should distinguish between:
- The currency used to purchase an investment
- The currencies of the underlying assets
- The currency in which income is earned
- The currencies in which future expenses will be paid
This becomes more important after relocation.
An expat earning in euros but holding most investments in the currency of a former home country may face a different currency risk from someone who expects to retire and spend in that home currency.
4. Invest Based on Objectives Rather Than Familiarity
Choose investments based on financial objectives, risk tolerance and future spending needs instead of simply investing in markets and companies that feel familiar.
An expat should consider:
- What is the investment for?
- When will the money be needed?
- What currency will future spending require?
- How much investment risk is appropriate?
- Which countries and markets are already heavily represented?
- Is an investment being selected because of its fundamentals or simply because it is familiar?
This distinction is important because home country exposure is not automatically inappropriate.
A home country investment may make sense when it supports a specific objective, such as future retirement spending, a liability in the home currency or an existing tax-efficient investment arrangement.
The problem arises when familiarity becomes the primary reason for holding an investment, resulting in an allocation that is significantly more concentrated than the investor's financial objectives require.
5. Rebalance as Circumstances Change
Rebalance the portfolio when changes in residence, income, property, pensions or future plans alter the appropriate level of geographic exposure.
An expat's financial position can change substantially after moving abroad.
A new job, property purchase, inheritance, pension change or planned retirement can all increase or decrease exposure to a particular country.
An expat who previously earned and invested entirely in the home country may gradually build significant exposure to the new country through employment income, property and savings.
The portfolio may then need to be reviewed to determine whether its original geographic allocation still makes sense.
Regular reviews can help identify whether an allocation that was appropriate in the past has become unnecessarily concentrated.
Rebalancing does not necessarily mean making frequent trades.
It means periodically checking whether the portfolio and wider financial position remain aligned with investment objectives, risk tolerance, currency needs and geographic exposure.
Why home country bias is a bigger risk for expats
Home country bias is a bigger risk for expats because moving abroad does not automatically remove existing economic exposure to the home country.
An expat may have financial connections to the home country through several different channels:
Investment portfolio: Domestic stocks, bonds and funds can create direct market exposure.
Property: A home, rental property or investment property can represent a substantial concentration in one country.
Pension: Retirement accounts may remain invested primarily in the home market.
Employment: Future earnings can create economic exposure to the country where an employer or business operates.
Cash: Savings may remain in the home currency even after relocation.
Business interests: Ownership of a domestic company can create further exposure to the home economy.
This creates an important distinction between portfolio diversification and wealth diversification.
How much home country exposure is too much?
Home country exposure is too high when investments, property, pensions, cash and other assets leave an expat excessively dependent on the economic performance or currency of one country relative to their long-term financial needs.
There is no universal percentage that makes home country exposure excessive.
The appropriate allocation depends on the investor's overall financial circumstances, including assets, liabilities, income, tax residence, future spending and investment objectives.
A useful starting point is to distinguish between financial exposure and investment allocation.
For example, an expat could have:
|
Source of exposure |
Home country allocation |
|
Investment portfolio |
25% |
|
Pension |
60% |
|
Property |
100% |
|
Cash |
50% |
|
Business interests |
75% |
Looking only at the investment portfolio would give an incomplete picture.
Start by assessing your existing exposure to your home country and how it fits with where you expect to live, earn, spend and retire. This can help you decide how much to invest elsewhere.
Conclusion
The biggest mistake in avoiding home country bias is to treat geography as the goal.
An investor can move a portfolio overseas and still remain exposed to the same economic outcome through property, employment, pensions or other financial ties.
For expats, there is also a timing issue. The financial structure that made sense before moving abroad may no longer make sense several years later.
A portfolio built around a former home, currency and retirement plan can quietly become misaligned as an international career and lifestyle evolve.
Expats can also develop a similar concentration in their host country, gradually shifting their investment bias from one market to another.
As an expat's career, income, property and financial interests become concentrated in the new country, simply moving away from the original home market may not have solved the underlying problem.
Email hello@adamfayed.com or WhatsApp +44-7393-450-837 if you have any questions.
FAQs
What are the major advantages and disadvantages of diversification?
Diversification can reduce concentration risk and reliance on a single investment, market or country, but it can also limit gains from a concentrated investment that significantly outperforms.
It may also increase portfolio complexity, costs and the risk of holding overlapping investments.
What type of risk can investors reduce through diversification?
Diversification primarily reduces unsystematic risk, such as company-specific, sector-specific or country-specific risk.
It cannot eliminate systematic risk, such as a broad market downturn or global economic crisis.
Why is home bias good in investing?
Home bias can be beneficial when domestic investments serve a specific purpose, such as matching future spending, retirement plans or liabilities in the home currency.
The problem arises when familiarity causes home country exposure to become greater than an investor's financial objectives justify.
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