UK shares form the bulk of my portfolio. And right now, despite concerns about the health of the UK economy in the near term, I feel incentivised to buy UK shares. So how much of my portfolio should be invested in UK shares? Let’s take a look.
Home country bias
Hargreaves Lansdown recently published an article looking at home country bias and what it means for investors. The phenomenon, which isn’t limited to the confines of the UK or US, describes a situation in which people have too much invested in domestic shares within their portfolios.
This happens because investors feel more comfortable dealing in an economy they know well and companies in which they are familiar. In some cases, investors may even feel like they have first-hand experiential data on how well a company is doing — maybe all my friends have started using a delivery app.
Why investing at home can be a good strategy
I always do my research before investing in a company. And that research can be a little bit easier if I’m familiar with the economic context these companies operate in. So it could be easier to make a thoroughly informed investment decision in my home country.
There is also the matter of exchange rates. And this is particularly important. If I were to invest in US stocks now, with the pound worth only $1.13, I’d be concerned that an appreciation of the pound could wipe out all my gains.
A year ago, the pound was worth around $1.35-$1.40. If I were to invest now, and the pound were to regain to previous levels, I could lose as much 20% of my investment value. So this is certainly something putting me off investing in dollar-denominated stocks right now.
Diversity is important
The FTSE 100 and FTSE 250 are among the worst performing global markets in recent months. In fact, if I were entirely exposed to UK stocks, my portfolio would have likely suffered even more than it did.
Thankfully, my non-UK stocks actually did rather well during that period. With the pound tanking, my USD-denominated investments soared in relative terms.
The FTSE also doesn’t offer me a huge amount of exposure to fast-developing sectors such as green technologies. Instead, the index is heavier on banking and resources. As such, investing in Nasdaq-listed tech stocks provides me with this exposure, and helps diversify my portfolio.
Here’s what I’m doing
Personally, I’m finding it tough to invest in US stocks right now given the weakness of the pound, unless I can find exceptionally cheap stocks. NIO is one such stock. The Chinese electric vehicle (EV) maker is down 40% over the month (74% over the year). As a long-term investor, I see now as a good time to buy this highly promising EV manufacturer.
So, for the moment, my portfolio is staying largely UK focused. And I plan on keeping it that way, with around 60% of my portfolio invested in UK stocks.
Despite concerns around the UK economy, there are incentives for investing in the FTSE 100. The index is full of companies that operate globally — 70% of index revenue comes from overseas. Plus, there are some sizeable dividend yields out there, and I don’t have to worry too much about exchange rate fluctuations.