Are you guilty of seeking the familiar when investing?

11 June 2025

When deciding how to invest your money, it can be tempting to seek the familiar. Indeed, familiarity bias, where investors stick to what they know, is a common type of financial bias. Yet, it could lead to an unbalanced portfolio. Read on to find out why and what you can do to overcome this bias.

It’s easy to see why people seek out familiar things. Sometimes the unknown can seem scary, so going to what you know may feel comforting. However, while it can feel safer, when you’re investing the opposite might be true.

Familiarity bias could affect investment diversification

Diversification is an investment strategy that mixes a wide variety of investments within a portfolio to reduce risk. This could include investing in different asset types, sectors, or geographical locations. 

By spreading investments across a wide range of opportunities, you aim to reduce investment risk. When one area of your portfolio is experiencing a period of volatility, it’s hoped that gains or stability in other areas will balance it out. So, by diversifying, the value of your portfolio may experience fewer sharp falls or rises.

While diversification aims to reduce risk, keep in mind that investment returns cannot be guaranteed. As an investor, your portfolio is still likely to experience some volatility and all investments carry some risk.

If familiarity bias is affecting your decisions, you might seek out assets you’re more comfortable with or choose domestic companies.

While understanding and feeling comfortable with your investments is a good thing, focusing on the familiar could be harmful. It may lead to an unbalanced portfolio that exposes you to more risk than is appropriate for you.

Let’s imagine you invest only in UK companies because you’re more aware of them and the market. If the UK economy entered a recession, it could affect a large portion of your portfolio and lead to a significant dip as a result.

In contrast, if you had a diversified portfolio, economic growth in the US, Asia, or other markets could provide some stability.

How to avoid familiarity bias when you’re investing

Set clear investment goals

Your goals should underpin your investment strategy and they may encourage you to base decisions on your objectives rather than familiarity.

Specific investment goals, such as creating a retirement income or a nest egg for your child, may provide clarity. When you’re weighing up if an investment is right for you, returning to your goal could help you assess the opportunity objectively – would the investment support your wider aims?

If you can see how investments fit into a financial plan, you might feel reassured when you step out of your comfort zone.

Understand your risk profile

One of the reasons some investors may experience familiarity bias is because they’re worried about the associated risks.

Familiar investments might feel “safer” but if they don’t align with your risk profile, goals and investment time frame, you could be missing out on potential returns. So, by taking the time to understand your risk tolerance you may be able to see when emotions are influencing your decision.

Regularly review your portfolio

Regular reviews of your investment portfolio could highlight when familiarity bias has affected your decisions. For example, when you look at the bigger picture, you might realise you’ve invested heavily in one area, so your investments are no longer diversified.

With this information, you can address imbalances and reallocate a portion of your portfolio if necessary.

Remember, when you review the performance of your investments, take a long-term view. It’s normal for short-term market movements to affect the value of your portfolio, but, historically, markets have delivered returns over a long-term time frame.

Work with a financial planner

Working with a financial planner can offer you an unbiased perspective that may help you correct familiarity bias. As a regulated professional, we can work with you to create an investment strategy that’s tailored to your needs, including potential investment you may have avoided because they’re unfamiliar.

Get in touch to arrange a meeting

As financial planners, we could help you assess your investments alongside your wider financial goals. Please get in touch if you have any questions about investing or would like to discuss how we could work together.

Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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