According to data from investment giant Fidelity most UK investors hold the majority of their portfolio in the UK. This is true across all age ranges, at all levels of investment (amongst their clients). It’s only when you hit the £500,000+ portfolio mark that people start spreading their investment elsewhere as much as or more than in the UK.
For the UK investor it intuitively makes sense to choose UK funds as a sort of ‘default’ choice – but is it a sound investment strategy? Or is it just familiarity?
Simple familiarity may not seem like rigorous enough reasoning to choose an investment destination, but there’s a lot to be said for it. It almost goes without saying that if you plan on taking any sort of control over your portfolio (and there’s a strong case for not just handing your money to a fund manager and leaving him to it) it’s good to be familiar with what’s going on.
And where are you most likely to know what’s happening? Your own country. Even if you shy away from the finance pages – admittedly unlikely if you’re investing – there’s plenty of economic news in the mainstream. You’ll hear it on the radio, see it on TV, catch it on the BBC News website… It’s in the ether. If something big is happening, you’ll know. The same can’t be said for investing in the U.S., say. Unless you take out a New York Times subscription you could easily miss something that would otherwise motivate you to move your money.
That familiarity will also help you feel more in control. The greatest fear is the unknown, and if when you visualise your money going to South East Asia you see a stream of £10 notes disappearing into a black hole, you’re going to be kept up at night. Even the biggest returns aren’t worth sacrificing your health.
Good business environment
Of course, the familiarity argument holds no water if it really isn’t good business sense to keep your money in your home country. Greece was patently a terrible place to invest in during the height of the Eurozone crisis. Argentina doesn’t make for a great investment environment during its periodic crashes.
UK investors are fortunate in that the UK is a genuinely good place to put your money. As UK Trade & Investment is keen to point out, the UK is the “number 1 destination for inward investment (FDI) in Europe.” And in 2012, the UK attracted the 7th largest amount of FDI in the world – impressive for such a small country. It’s not always a good idea to follow the crowd, but equally, money breeds money; and that overseas investors put so much faith in the UK economy is a strong signal that we should too.
There are concrete reasons for the UK’s strength as investment destination – it’s not just a case of good money following bad. We have a favourable tax environment. A history of innovation. We have been rated one of the easiest places to do business in Europe – rated 7th globally. As a member of the EU we offer access to the largest single market in the world, whilst remaining partially protected from Eurozone turbulence by virtue of our historically strong currency.
Investing in your community
There’s also a socially responsible argument to be made for investing in your own country. Particularly during this period of recovery, the more money that flows into UK companies, the faster the economy can get moving. UK investment means UK jobs, which gets more money in the wider economy.
OK, if you want to get really serious about investing in your community you can look into angel investing and local peer-to-peer micro-finance initiatives, but most individual investors don’t have the time, inclination or capital to get involved in that sort of thing seriously.
It’s the equivalent of deliberately buying a British-made car rather than putting your salary into propping up the German auto industry.
What about investing overseas?
That’s not to say there’s isn’t merit to investing overseas. And considering how much money comes into the UK from abroad, some of your money may trickle back here anyway.
To not invest abroad would be to miss out on some excellent opportunities. For example, on the same reasoning for investing in the UK, it makes sense to invest in the U.S.; which attracted the 2nd highest amount of FDI in 2012, and has a notoriously business-friendly environment. Or China, which attracted the most FDI in 2012 – although China’s growth is slowing down, at last count the country’s GDP still grew a remarkable 7.7%.
Spreading investment between regions is also useful as part of a diversification strategy. Just as spreading between sectors hedges risk against something like the dotcom bubble, investing in multiple regions helps protect against single markets, or entire regions, going under – Argentina, the Eurozone and so on.
But for those investors just starting out, with little knowledge and small holdings, who tend to stick to UK investments – yes, it makes sense to invest in the UK. It’s not just ignorance or laziness. There is a good case for it.