Horticulture is a tough business. One that currently seems in perpetual crisis with a fruit picker shortage reaching crisis levels. Orchard owners face a constant stream of challenges ranging from commodity price volatility to their exposure to natural events and closed borders, as seen in the past year with COVID caused distress.

In New Zealand, our horticulture sector represents a significant credit exposure of our banking sector, which is growing by 15 per cent a year. Technology can present an opportunity for horticulture, but scale means the efficiencies and the benefits are typically skewed to the largest orchards.

Horticulture is forever an unfortunate lesson about diversification. Nothing highlights the dangers of being undiversified more than a small family farm. Small orchard owners often have to concentrate their operations around one or two commodities or varieties. This is no criticism; their options are quite often limited. It leaves them highly vulnerable to variances such as weather, government policy and consumer behaviour. One variance from expectations can quickly take a season from profit to loss.

But if you asked an orchard owner, given the opportunity, would they add another 20 other commodities while using the same amount of resources to diversify their income, you could bet they'd take that option. Their risk is lower meaning the likelihood of a catastrophic loss would be much lower. Unfortunately, these are mostly luxuries of scale and determined by location.

But for a small investor, it's a different story. They have access to broad diversification options that can lower the risk of any catastrophic loss while allowing them to capture market gains across the world's capital markets.

Unlike the farmer, a small investor diversifying a portfolio isn't capital and cost-intensive, and their investments are liquid. A smaller investor can often globally diversify at a lower cost than in their domestic market.

Sadly, Kiwi investors aren't overly keen on diversifying. The New Zealand Stock Exchange (NZX 50) makes up only 0.01% of the world's share market capitalisation, yet most New Zealand investor portfolios are overly weighted to the home market.

A New Zealand investor with a strong home bias and heavily invested in the NZX 50 would have only a 7% allocation to technology, compared to approximately 16% in the global portfolios. This is comparable to the times, not that long ago, when most Mum & Dad investors' experience with a diversified portfolio was a handful of AMP, Telecom, Telstra shares, and some with longer memories GPG and Brierley Investments ‘BIL’.

Everybody loves the comforts of home, but investors who become too anchored to familiar territory can end up with a very narrow view of the world.

Home bias, the tendency of investors to allocate a disproportionate amount of their funds to their domestic market, is a well-documented phenomenon.

Why might this be?

Lack of quality advice would be the apparent factor but don't discount high dividends and imputation credits being a likely lure for such a significant home country bias. There's no true diversification in those New Zealand focused portfolios.

The most common criticism of diversification you might hear is it's for people who don't know what they're doing. This may be true. An investor might not be interested in the earnings before interest, taxes, depreciation, ROI, or cash flow of a company, but even knowing about these things doesn't automatically protect an investor from random events. Market forces can sneak up, while legislative and governance issues can strike without warning.

For example, in the last three months, the NZX 50 returned -7.04%, while the  S&P 500 returned 8.85%  for the same period.

Given investors tend to source most of their income from their home nation and hold most of their other assets there, I often view this degree of home bias as a huge bet on one country, a couple of sectors and a handful of stocks.

So the question then becomes what degree of home bias is acceptable. It shouldn't be surprising that there is no one correct answer to that. It depends on each investor's tastes, preferences, circumstances and goals.

The solution: Diversify. Do so broadly in different asset classes and different stock markets. From 2000 to 2009, the S&P 500 only returned 1.4 per cent per year, but other markets picked up the slack. A well-diversified portfolio would have done well, no matter what.

There's a reason you diversify, and it's nothing to do with how knowledgeable you are. Or maybe it does. The knowledge you can't see the future. What's useful for you as an investor is having a financial adviser who relies on academic research shown to be sensible, persistent across different periods, pervasive across markets and capable of being cost-effective.

Over the decades, we've seen investors chasing "hot" sectors/industries and getting fingers burnt.

Through careful diversification, discipline and maintaining a level of flexibility, financial advisers can help ensure that a single sector doesn't have a disproportionate influence on your investment outcome.

• The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz