Stocktake: Home bias costs investors dearly (just ask a Russian)

The collapse in Russian equities – an index of London-traded Russian companies has plunged 98 per cent – is the latest reminder of the dangers of home bias.

Home bias – overweighting your portfolio with domestic stocks – is a big problem in Russia. The 2022 Credit Suisse Global Investment Returns Yearbook, which stresses the importance of global diversification, notes Russia accounted for just 0.34 per cent of global stock market capitalisation. According to Schwab data, however, Russian investors recently had 95 per cent of their equity portfolios invested in Russian stocks.

While Russian home bias is acute, it’s a global problem. US investors have 75 per cent of their stock holdings in US stocks, even though the US accounts for 58 per cent of global stock market capitalisation. Greek investors have over 70 per cent of their stock holdings invested in Greek stocks. The comparable figure for French investors is almost 60 per cent.

Besides geographic concentration, this ensures portfolios are not diversified across sectors. The US market “acts a lot like one big technology fund”, notes Schwab. Canadian indices perform like the energy sector; Japan’s market “closely tracks” the global financial sector; Germany’s market resembles the performance of auto stocks.