Home sweet home
Investing at home can feel safe – after all, we know the environment, the politics and, often, the businesses are household names.
But this feeling of safety – or home equity bias as it is sometimes known – can actually be misguided. Experts tend to suggest that diversifying by spreading investments across several geographic and economic areas can cut financial risk. It doesn’t always work but the theory goes that if one country is hit by bad conditions having some funds in another, unaffected country can pay off. Likewise, a foreign country might have particularly strong conditions and investors only exposed at home miss out.
An article in eZonomics’ Cup-o-nomics series explains further, using the example of football support.
But I am an expert in technology
Just as investors feel familiar with their own country, they can also feel familiar with the industry they work in and end up financially over-exposed to one sector. Researchers in Norway found investors often buy shares in firms in industries that they work in. Even excluding shares in their company the investors worked for, the study found high ownership of “professionally close” shares.
From a diversification point-of-view, it could be dangerous to “put all your eggs” in one sector. If it takes a hit, an investor might find themselves out of a job and with shares that have dramatically fallen in value.