Why home bias could hurt your portfolio

Australia represents just 2% of global equity value. So why do so many portfolios rely on it for most of their equity exposure?

Australians tend to back what they know.

It is one of the reasons big bank shares are a staple of so many portfolios.

For much of the past two decades, that instinct has been rewarded. Even as international investing has become more common, many Australian portfolios remain heavily anchored to the local market.

The debate around home bias is not really about geography. It is about opportunity.

Home bias is not uniquely Australian. However, it has gradually declined across many major pension markets over the past decade.

As research from the Thinking Ahead Institute shows, Australia continues to maintain one of the highest allocations to domestic shares in the developed world.

That would be less remarkable if Australia occupied a similarly large share of global equity markets.

It does not.

Australia represents around 2% of global equity market value, yet Australian investors continue to allocate a disproportionately large share of their portfolios locally.

The more interesting question is not why Australians own so many Australian shares. It is why they expect a market representing 2% of global equity value to provide most of their equity exposure.

Behavioural finance helps explain why.

Daniel Kahneman's work showed that investors often mistake familiarity for safety. Home bias is one manifestation of that tendency.

It should be said that home bias is not the same as a criticism of Australian companies.

Australia remains home to some of the world's strongest banking franchises, globally significant resource companies and a dividend culture that is rare among developed markets.

But the reality is that the global economy has evolved far more rapidly than the composition of the Australian share market.

Financials and materials have dominated the ASX for decades and, as at 31 May 2026, still accounted for more around 50% of the market.

By comparison, those sectors make up less than 18% of the MSCI World ex Australia Index.

For investors, that has real consequences.

Many Australians who believe they are diversified because they own a broad Australian share market fund are often making a much larger bet on banks and resources than they realise.

If housing, credit growth or commodity prices struggle, a significant portion of their portfolio would be exposed to the same risks at the same time.

In contrast, the industries driving global market returns sit outside Australia's traditional strengths.

Technology, healthcare and advanced manufacturing have become larger parts of the global economy, while banks and resources continue to dominate the local market.

The solution is not abandoning Australia. It is recognising that diversification is about more than geography.

It may mean complementing Australia's strengths in banks and resources with exposure to global healthcare leaders, financially strong international companies, emerging markets or smaller companies that operate in very different parts of the economy.

For much of the past decade, global equity returns were increasingly driven by a handful of large US technology companies.

Their dominance was so significant that many investors came to treat international investing and US technology as effectively the same thing.

But that is becoming less true. Strong returns are no longer coming from just a handful of US technology companies.

So far in 2026, value equities, emerging markets and growth equities have all outperformed both the ASX 200 and the Magnificent Seven.

For many years, investors could reasonably point to the practical barriers of investing internationally. Accessing global markets often meant expensive managed funds, high fees and limited transparency.

Today, those barriers have largely disappeared thanks to the adoption of ETFs.

Investors can access international quality companies, global healthcare leaders or thousands of emerging market companies as easily as they can buy an Australian bank or miner.

The challenge is no longer access. It is allocation.

Home bias made sense when the Australian market looked more like the global economy. It makes less sense as the gap between the two continues to widen.

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