Home bias could be hurting your portfolio

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Here’s a fun one. On your way to work, how many UK businesses can you spot, whose shares you could buy if you wanted to? I got six this morning. Seven, if I’m honest about the steak bake in my pocket.

The companies we know and use every day have a knack for finding their way into our portfolios. It’s only natural - we habitually sample the products, experience the services first-hand and observe where everyone is queuing in real time. But, while investing in what we know isn’t necessarily a bad thing, relying on what’s nearby and familiar to the exclusion of everything else might be.

Home bias is the investing equivalent of booking a table at the global buffet and only reaching the Yorkshire pudding station. Now, there’s nothing wrong with going for what you know but there’s a wealth of sushi, tapas and marinated skewers you haven’t even looked at. Those different cuisines could really diversify that plate of beige.

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Piling up the puds instead means UK institutional investors (pension funds etc.) and retail investors (you and me) have put around 30% and 45% of our assets, respectively, into UK equities in recent years [1,2]. Given the UK only makes up less than 4% of the MSCI World Index, there’s clearly more at play than a slight preference for homegrown stocks.

The US dominates the MSCI World Index; the UK accounts for 3.6%

Normally, this is where the home bias chats tail off. We all agree to think a bit more about geographical diversification and call it a day. And, if your only takeaway is a useful reminder to avoid gifting a stock a place in your portfolio just because it’s a local brand, so be it. There’s a lot more to consider when you’re researching a potential stock pick and it’s one way that adding a top-down element to your approach could help.

But, there’s also a bit more behind the initial problem if you dig into the detail.

Hang on, isn’t everyone ignoring UK stocks?

Given the strength of US markets, since the pandemic in particular, and the relative lack of technology in the UK market (3.6% of the FTSE 100 compared with the S&P 500’s 33.5% [3]) UK indices have seriously struggled to attract investment, especially from UK investors. In 2024, we added £19.5bn to global equity funds, £11.9bn to North American funds and withdrew £9.6bn from UK-focused funds [4]. Private equity firms and US firms have been snapping up UK shares and whole companies, such is the value they see on offer but there’s still no real movement when it comes to UK retail allocations.

Moreover, UK investors have rushed to invest in US assets and, realistically, who can blame them? Valuations may be high (we’ve discussed why that is before) but earnings have supported the majority of the leading names thus far and the AI story has captured imaginations as well, rather than arguments for the UK, which tend to begin and end with how cheap it is. This hardly demonstrates an active UK home bias so have we finally turned a corner? Not quite.

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Even with such a frosty attitude towards domestic shares, our UK allocations still hover around 20% [7]. So it’s not about absolute exposure, rather it’s about relative exposure against the global benchmark - and that’s where our bias is betraying us.

What it shows us is that falling into passive home bias is the real concern. We can even get complacent when we try to fix it but overegg the pudding. The likes of huge growth in the Magnificent Seven (the group currently accounts for more than 30% of the S&P 500) can shift the dial the other way and replace home bias with a kind of anti-home overweight elsewhere.

In general, a passive slip into home bias can happen when:

• We take our eye off our allocations and keep adding the odd homegrown stock here and there until we’ve got a full UK portfolio.
• We don’t keep up with the way markets are changing and how big a part our country’s index has to play in it.
• We opt for what’s seemingly easier to research because we think we know the business already.
• We don’t consider our pensions or wealth managers’ allocations made on our behalf.

None of this is the result of being a staunch flag waver, it’s more subtle than that so it can crop up without us even noticing. There’s also the threat of an overly gloomy attitude to our market (who, us? Never) scuppering any allocation at all, simply because we see it more often.

Status quo: investing all over the world?

Justified or not, unfortunately it all adds to the initial idea of how easy it is to stick to the status quo rather than consider an option outside of our natural comfort zone. The UK market made up 11% of MSCI World in the year 2000 [5] - if you blindly kept your allocations steady you would now have quite an overweight position relative to the benchmark, instead of matching it. Similarly, if you saw the c33% in technology in the S&P 500 Index around the dot.com peak, watching that fall to around 14% in the post-bust trough in 2003, [6] you might now be surprised to see it back at the 33.5% we mentioned earlier. A core and satellite approach set up in the early 2000s, combining a central holding of the S&P 500 complemented by some individual tech holdings, might have seemed like a conservative allocation to the tech sector back then but would undoubtedly massively overweight the sector today.

While we shouldn’t be chopping and changing our long-term portfolios every day, we should avoid slipping into situations like these, where small changes over time pass us by to the extent that our asset mix is unrecogniseable later on.

It all makes the case for regular (but not short-term) rebalancing. Keep your financial goals, tolerance for risk and time horizon front and centre, and check in once or twice a year to make sure your chosen asset mix is still targeting your aims. In the end, we naturally tend to give a lot more importance to our immediate surroundings than we should and a lot more weight to the stocks we already own than anything else out there (the IKEA effect). It’s a big world though and, while the modern trend seems to be concentration and isolation, sometimes we need to take a step back and take a fresh look at what we always assumed we knew.

Sources: [1] Elston Solutions, 16 August 2024 [2] T. Rowe Price, July 2020 [3] Vanguard, as at 31 August 2025 [4] Calastone, January 2025 [5] Financial Times, February 2023 [6] Investopedia, 2017 [7] The Investment Association, August 2024

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.