Is the Home Bias good or bad for you?

Where do you think Singaporean investors rank in terms of domestic equity allocation in % of total equity?

Do we have more or less than 50% of our equity invested in the Singapore stock market?

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From my anecdotal encounters with some fellow investors, I would have looked for Singapore far to the left on this chart.

To my surprise, Singapore is featured far to the right of this chart. Right next to my home country Germany.

Hmm, looks like we don’t have too many people making the mistake of focusing only on their home markets.

It would be understandable as it is their home ground and they are more familiar with their local stocks. But buying stocks headquartered near their houses, as if being within driving distance could somehow make companies safer, is too narrow-minded.

Imagine your job is in Singapore, your house is in Singapore and your stock portfolio is mainly invested in Singaporean companies.

Yes, your eggs are in several baskets.

But all of those baskets are on the same lorry called Singapore.

If that lorry meets with an accident then the best result might be a meal of scrambled eggs.

Can we both agree on the following notion?

In the investment field, there is no one instrument that can perform all the time, and there is no one who can say with certainty — in advance — which instrument would perform best. 

The future is uncertain and markets are random.

Based on that notion my aim is to diversify across investment baskets — with many eggs in each — so that I will not be “done in” by any one event.

Because investing my money is not just about building wealth, it’s also about not destroying wealth.

I call it ‘real diversification’.

Real diversification helps me towards my top priority: to avoid big losses. Because as soon as I experience those big losses, I’m afraid my emotions would lead me to abandon the strategy at the worst possible time, right at the market bottom, when I shouldn’t be doing anything (except buying more).

Real diversification means lowering the risk of bad decisions.  Because when the stock markets crash, I’m always going to have another asset going up in value to calm my nerves.  This reduces investing stress that can help me to maintain optimal investor behaviour — which typically helps returns.

Investors who can find calm and clarity amid chaos, amid inevitable changes in market conditions, or amid personal situations, understand that a diversified portfolio — and not a so-called “winning” trade — is the key to financial security.

Why do you invest?

Would you rather win, or would you rather be financially secure? 

They are not the same thing.

I know what I want that’s why I frequently remind myself:

That I am an investor, not an entrepreneur. There’s no need for me to put all my eggs in one basket.

Not to forget to revisit my choices periodically: Not daily, but yearly. Because my attitude towards risk depends on the frequency with which I monitor my portfolio.

Why would you want to check your stocks twice a day, but your cholesterol twice a decade? The former is killing your emotions and the latter is killing you.

Have YOU made up your mind? Is the home bias good or bad for you?

“… the know-nothing investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.  Diversification is protection against ignorance.” – Warren Buffett

“It’s really just common sense — don’t put all your eggs in one basket. The same advice has been suggested by Shakespeare, the Bible, and the Talmud.” — Brendan Mathews

“Make sure all your investments still fit comfortably in your baskets. Do not diversify into hundreds of eggs.  That might end in a massive indigestible omelette. 15 to 30 is a good number.” — Andy G. Schmidt