What is home bias?
Home bias is the inclination for investors to invest most of their savings into local equities and bonds.
The phenomenon was first highlighted by a research paper made by Kenneth French and James Porterba in 1991. They concluded that most investors still hold most of their assets in local assets, despite research-backed benefits of international diversification. Home bias led to higher risk in their investment portfolios over the long-term.
This phenomenon has been observed recently, and in Singapore as well. As evident from the chart below, despite how Singapore equities only represent 0.4% in global equity indices, on average, Singaporean investors have 39% of their portfolio in Singapore’s stocks.
Source: Vanguard, IMF’s Investment Survey, Barclays, TR Datastream, and Eastspring Investment. Compiled by https://apngroup.com.au/blog/how-sweet-home-bias-can-turn-sour/
Why is there a tendency to invest more in Singapore?
There are several reasons why investors tend to favour investing in domestic equities and bonds, and many of the reasons are consistent across nationalities.