High focus on Sweden

Hi all,

I am a small investor from Finland and I have been following your shows and the forum a lot. One thing I notice, is that quite many people here tend to overweight Sweden by a huge margin. For example 40 % small cap, 20 % investment companies, 20 % new tech, 20 % real estate, all Swedish. I wonder if that is really a wise decision in the long term?

For example, if we look returns from 2006-2020 of MSCI EAFE index, we can see that there is a huge distribution of results. Yes, SWE did great in this time period, 8,24 % annual, but so many other countries did worse. Do we think that Germany (6,49%) is a worse place than Sweden to invest? Or Norway (4,06%%), Japan (3,67%), Finland (5.36%), Canada (5,28%)? Or how about Belgium (1,78%) or Austria (-2.25%)?

Now, how about a global index, which often could be a good choice. We know that stock returns are highly skewed, which means that only a very small percentage of stocks generate the most return. If we only invest in Sweden, we would have missed USA phenomenal results for the last 10 years. The dividend withholding tax saving advantage (0,3%) for Sweden is nothing comapared to the amount lost by lack of global diversification.

If we look at very long time periods, we can see quite different return distribution there too.
image
Sweden did better than the developed market average during this time, but Sweden was also very lucky with avoiding the worst conflicts of the two world wars succesfully. Austria, Belgium, Germany, Spain, Japan, Ireland, Switzerland, even Netherlands failed to reach the average of the Developed World 8,4 %.

Now, normal investors investing life time may not be 120 years, but closer to 30-40 years or so. There may be quite high chance that investing only in Sweden would end up behind the developed markets average. Perhaps there could be a good reason for some home bias, like 10-30% of portfolio, because of maybe urrency diversification and taxation benefits. However, I do not agree with Christian Lundström that you should invest in Sweden if you plan to live in Sweden. What if Sweden does not do just as well as the developed markets in general, or could do much worse? Then you would be happy to have invested globally.

Note: the photos are quite random and I dont take responsibility of the numbers and percentages, lets not go too deep there. I mean to convey the general idea of focusing so much on one country that makes up very small part of the global index. Thanks a lot for reading, lets have a good conversation :slight_smile:

5 gillningar

10-20% home bias is most commonly recommended here. The RikaTillsammans-portfolio has 10% home bias. Lysa, which is often recommended, has 20% home bias. Investing everything in a country that accounts for 1% of market share is definitely high risk.

Unfortunately the average home bias is much higher, see e.g. https://www.vanguardinvestments.se/documents/strategic-asset-allocation-brief-tlor.pdf

3 gillningar

Ilari, your point would make a lot of sense in our home country or for example in Austria, but our Nordic neighbours are a bit different story since they have their own currencies.

OTOH, like I stated in another thread, overemphasizing The Nordic when investing makes sense since we have high standards of trust, integrity and governance in our societies, which normally is one of the dominating factors of economical success.

All the best / kaikkea hyvää!

1 gillning

With the assumption/hope that this is not priced in already?

Well this sounds very reasonable indeed. I think maybe the voices who go for 100 % sweden are louder than the majority opinion of the forum. I should add, that I’m myself thinking of investing in xact småbolag myself. I have been salivating after investment companies too, but fear a bit that trade is now over saturated with masses piling in based on the great past performance. Spiltan Investment company fund seems to be one of the favorites for swedish investors.

A good point there.

I also like this idea and agree. Theoretically it should show in the share sprices, but there could still be something in there. For example, these stable countries being able to surprise positively more often. However, USA being the archtype of capitalist and entrepreneurial society would also warrant similar argument. I must confess, I have been thinking about a portfolio of 0 fee, 0 tax Nordnet superfunds and very cheap synthetic USA etf’s to get very effective and inexpensive exposure to economic areas that I find favourable for positive future results. So far I am torn between different strategies to be honest, and not yet locked in any of them.

One argument for home bias is that you remain in touch with your peers, especially in times where your home market out performs the global market. E.g. when you are bidding on a house, since people typically have large home biases their wealth will have grown in sync with the market. You can also argue that this further applies if you have an unsecure/high volatility in pay/employability job.

If you want to look at the contrarian perspective & perhaps you work in a very stable industry, in times that the global/foreign market outperforms the home market you have a definitive advantage when buying that house.

On a more subjective level, the only markets that I know anything about is the swedish & US (when it comes to companies and so on) which means that I’m more likely to over-invest in them also.

Unfortunately the Nordnet superfunds include so few companies (Both Finland, Norway and Denmark superfunds only have 25 companies each), all large-cap.
I don’t know if you have access to Handelsbanken Norden Ind Crit, which I personally think is better, and contains 14% small-cap.

1 gillning

Yes, they definitely are not very diversified funds and would be quite risky. Outcome in 30 year scale could vary dramatically compared to a global index, with a bias to downside, I reckon.

Interesting perspective, thank you for sharing!

Maybe if there was more diverse selection of funds for us it would be better to concentrate more in nordics. You swedes do have nice selections, you are so much ahead in investment products. I dont have access to AMF or PLUS funds etc in Nordnet Fi. Just expensive active mutual funds mainly.

If taken as a blanket statement about expected returns, the “home bias” thesis is plainly moronic. For example, a ukrainian national would in all likelihood be significantly better off if they had their savings in the S&P500 than in the analogous ukrainian index. Why? Because the ukrainian market is a dumpster fire while the US market is one of the most efficient in the world. Clearly, there are no sensible reasons to expect a given a market to overperform just because you happen to live there.

However, this is not to say that it must always be stupid to overinvest locally. In particular, the cost of participating in the local market is often lower than the cost of participating in foreign markets, which can make local investments more efficient. And I’m not just talking about pure monetary fees here. You can typically acquire tons of valuable information about local companies simply by leading an ordinary life that would be much more difficult to acquire for analogous foreign companies (and some countries, like China, intentionally hide economic information from foreigners).

In addition, since the principal benefit of global diversification stems from the (potential) lack of correlation between the global and local market, it also becomes less beneficial to diversify globally the more integrated your local market is in the global economy. For example, many westerners believe that they can hedge against local crashes by investing in emerging markets. But in reality, the largest players in the emerging markets scene are now so deeply embedded in the global economy that they are likely to crash just as hard as the developed markets when the latter eventually goes down (cf. the 2008 housing bubble).

So in short, while you can’t rationally justify “home bias” with reference to nationality alone, you can potentially justify it with reference to (high) transaction costs and (low) marginal benefits.

3 gillningar

In addition to what was said above Sweden does have an extreme proportion of international companies, relative to its population. Investing in the swedish stock market does not automatically mean investing mainly in companies highly dependant upon the small local swedish market. To what extent this varies for other countries vary. Germany is a good example of a country with a similar profile whereas many other European countries have economies and stock markets heavily oriented towards one or a few sectors

Yes, this is true for even the Helsinki börsen.
But even still, if you would not invest elsewhere, you would not have owned even a portion of FAANG stocks. This would have destroyed all the tax benefits there are. Who knows if the next super stocks come from Japan. Or maybe they come from Nordic countries :slight_smile: