Psychologie a chování
Investment Mistake of the Month: Underestimating Currency and Concentration Risk
Key takeaways
- Concentration in one country or currency is one of the most common investment mistakes.
- Home bias arises from the psychological feeling that the "familiar" is safer.
- Currency risk can wipe out returns even when the underlying assets perform well.
- The solution is intentional geographic and currency diversification of the portfolio.
- Regular allocation reviews help identify unwanted concentration.
Underestimating currency and concentration risk is one of the most common and costly mistakes retail investors make — and yet it can easily be prevented with simple diversification.
What Home Bias Is and Why We All Have It
Home bias is the tendency to invest predominantly in your home country or currency because it feels safer and more understandable. A Czech investor buys Czech equities or koruna-denominated funds; an American investor overloads their portfolio with US names. The psychology is understandable: familiarity reduces perceived uncertainty. But the reality is the opposite — a local economy moves through its own cycles, and a domestic crisis hits an entire home-country portfolio at once.
Currency Risk: How the Koruna Changes Your Returns
A Czech investor buying a dollar-denominated ETF is not only investing in equities — they are also betting on the dollar appreciating against the koruna. If the dollar weakens by 10%, one-tenth of the return is lost even if equities went up. The reverse scenario also holds: a weaker koruna boosts returns. This currency component is invisible but real. Many investors only become aware of it when they experience their first major exchange rate move.
How to Spot the Mistake in Your Own Portfolio
- Calculate what percentage of the portfolio is denominated in a single currency
- Find the geographic breakdown of the underlying assets — not just where the fund is registered
- If more than 60% consists of one country or one currency, that is a signal for change
- Watch out for apparent diversification: Czech ETFs may be denominated in EUR but invest primarily in US equities
Practical Solution
Globally diversified ETFs automatically spread exposure across dozens of countries and currencies. A properly built portfolio should reflect the global economy, not the geography of the investor's residence. Currency hedging is an option, but for a long-term investor it is usually an unnecessary cost — currency fluctuations tend to average out significantly over a long time horizon.
FAQ
What is home bias?
The psychological tendency to invest predominantly in your home country or currency out of a feeling that you understand it better. In reality, this "familiarity" does not protect against a local crisis and reduces portfolio diversification.
How does currency risk damage returns?
If assets are held in a foreign currency and that currency weakens against the koruna, part of the return is lost. A 10% appreciation of the koruna can wipe out a solid equity return in absolute terms for a Czech investor.
How can I get rid of concentration risk?
Globally diversified ETFs automatically spread the portfolio across dozens of countries and currencies. It is enough to check the geographic breakdown of the underlying assets once and set the allocation deliberately rather than by accident.
Should I hedge currency risk?
For a long-term retail investor, usually not — currency hedging costs money and over a 10+ year horizon exchange rate movements tend to largely cancel out. Hedging makes sense with a shorter time horizon or very high exposure to a single currency.