Goldman Sachs: Home bias could negatively affect your investment portfolio

Reluctance to invest abroad damages portfolios in the long-run, according to research by Goldman Sachs. A more diversified portfolio would cope better with shocks.
Jose Usrua, a global economist at the bank, stated that over the last decade capital has remained mostly on home ground. "Over the medium-run, home bias can either be a curse or a blessing, depending on  where shocks originate. Over the long-run, however, high levels of home bias are likely to reveal diversification pitfalls that could be damaging for global investment portfolios."

Better technology, more established financial markets and fewer rules on moving capital overseas has provided investors with better options to diversify portfolios globally. Over the last decade however, domestic holdings of broadly-defined domestic equity have only gone from around 81% to 76% in developed markets and from 90% to 88% in emerging markets.

The financial times responded to the article with: "It is odd that home bias still rules given the benefits of diversification and the spread of portfolio optimization theory. Particularly as passive investing has gained in popularity and it has become much easier to move capital across borders."

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Source: The Financial Times