Are you guilty of home country bias?
If you have all your investments in South Africa, then you’re guilty of home country bias
. And you’re not alone.
Many investors are guilty of investing all or the vast majority of their cash in their home country. By doing this, you’re increasing your investment risks, Amber Lee Mason in Daily Wealth
If you look at the stock markets on a global scale, South African companies make up a tiny fraction of what’s out there.
And that’s not all. If you live in South Africa, your job, property and perhaps other interests are also South African specific.
You might see the problem emerging here. The problem is you’re lacking in diversification outside of South Africa. Exposure to other markets can lower your risk.
Different markets respond slightly differently to different factors. By investing some of your portfolio in overseas markets, you can offset some of this risk.
How to combat home country bias
As a South African investor, in the past investing overseas meant applying to the Reserve Bank to use your offshore allowance.
Luckily these days, there are many instruments out there that can help you achieve overseas diversification without taking a rand out of the country.
You could opt for a unit trust fund that concentrates on overseas markets. An example of this is Old Mutual’s Global Equity Fund.
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Or you could opt for an exchange traded fund (ETF). Some give you global exposure, whilst others focus on a particular region, such as Japan or Europe.
This means it’s very easy for you to add some overseas flavour to your portfolio. And this will help cut reduce some of your investment risk.
So there you have it, why you shouldn’t have all your eggs in a South African basket.