We’re continuing our series on the biggest mistakes investors make as defined by Tony Robbins in his latest book Unshakeable. The point that the gentle giant is making is that we all tend to invest too big a portion of our portfolio in our local, domestic market. This has long been one of my biggest moans about financial advisers. Their view of diversification is to have twenty five percent in this UK equities fund and 25% in someone else’s UK equities fund.
Problem is, there aren’t enough shares to go round. In America there are twice as many investment funds as there are companies listed on the stock market! That means massive overlaps between the holdings in each fund and very little room for competitive advantage from one fund manager to another. America accounts for just under half of the global value of all stock markets. Yet the average American has three quarters of their portfolio in US stocks.
But before we give the Americans a hard time, we need to stick it to the Swedes. Their stock market is a tiddler, forming just one per cent of global market value. Yet Stig and Benny have forty eight per cent of their wealth tied up in Volvo or whatever else can be found on their equivalent of Wall Street. But the all time loser award goes not to any Western economy but to the land of the rising sun. If you’re as old as me you’ll remember how it seemed like Japan was taking over the world in the nineteen eighties. Mr and mrs Takashaki had a mere ninety eight per cent of their savings in the Japanese market when on that fateful day in nineteen eighty nine when the Tokyo market tanked.
Nearly three decades later, even biblical money printing by Mr Abe has failed to get the market back to those dizzy heights. Before you get too smug, what makes you think a similar thing couldn’t happen here? If you think the stock market is a one way ride to the stars, you need to read more history books.
The technical term for this tendency to stick with what we know is ‘home bias’. One of the ways in which this manifests itself is when people are offered shares in the company they work for, maybe as part of a save as you earn scheme. Usually there’s some kind of discount attached to the deal so you feel like you are making money when you acquire the shares. But remember, they are being offered as a form of golden handcuffs to keep you in the job. If you happen to work there at a time when the company is experiencing explosive growth, you’ll be tempted to max out the opportunity and overdose on your own company’s shares.
All it takes is an industry downturn or a disruptive new technology and you can find yourself under water with a shed load of shares that are now worth less than you paid for them. I saw this so many times in the Nasdaq boom and bust twenty years ago. Tens of thousands of paper millionaires followed the bubble up and saw their wealth evaporate when it popped in two thousand and one.
So how do we protect ourselves from home bias? You already know the answer. Real, genuine, across the board diversification. During the first decade of the millennium the S&P500 produced a miserly return of just one point four per cent per annum including dividends. So every American with seventy five per cent of his wealth in the home market experienced a lost decade. During those same years, emerging markets across the world averaged sixteen point nine per cent a year returns.
Diversify across countries and stock markets, go beyond stocks and shares into bonds, property, precious metals, land, cash and all the other types of asset you can think of. Let me finish by setting you some homework. Write down every investment you own, including which market it’s in and the underlying type of asset. Then work out what percentage you own by country and by type of asset. It’s a great way of cutting through the bluster, hype and buzz words to focus on the facts. If you find you are way too concentrated in one country or one type of asset, start work on your diversification strategy today.
If you think the best money can only be made in the country where you live, be very careful out there…