Recommended home bias for Switzerland / Europe?

Hi - I currently have 20% of my equity stocks portfolio in a swiss indexed, (and 75% world index, 5% US)
The idea behind it is to diversify and protect against currency variations, but I feel 20% is likely overweight. My retirement plan (Pillar 2, Pillar 3) are in CHF so the actual % is closer to 35% for my full assets. That being said, I can’t access / withdraw from these accounts before retirement.

Question: what is the recommended home bias for CH or EU residents?
Do we actually need a home bias, if we already have retirement accounts in our local currency?
Is our salary (if in the same currency as residency country) a form of protection as well?

I would avoid overweighting the Swiss market and rather buy currency-hedged ETFs if I would think currency is a problem (personally I don’t think so).

Personally, I’m also pretty sure the Swiss and/or European markets will not beat the overall market.

If I would overweight something then probably the US because basically everything cool and innovative comes from there, not from Europe or Switzerland. Maybe also China is a candidate if they could get their sh*t together politically, but that’s a bit of a bet where I’m less confident.

2 Likes

Maybe we don’t need a Swiss home bias, but I also have 20% in Swiss stocks across my combined ETF and VIAC portfolio (not considering 2nd pillar which would increase Swiss bias further). I like to believe that overweight exposure to Swiss stocks stabilizes my portfolio and reduces currency risk somehow…
However, looking at my results since 2017, I should have gone full ‘All World’, would have been much better.

1 Like

I’m 100% Swiss stocks in taxable. The reason I’m not in 3a is that the actual assets don’t belong to me but to the pension fundation and it’s up to them to sort out any political/fiscal trouble that may arise.

My reasoning is that:

  • My government is the most likely to try and protect me if things go south. A foreign government may try to protect its citizen at the expense of foreign investors if the worst happens.

  • My government is the one I have the most impact on. If I’m not happy with what they’re doing, I can try several measures, political, legal or others to try and convince them to be more fair to me. If my government is really unfair to its own citizens, I’m more likely to find other people who share my view of its actions and gather more political or other power to change the way things are being handled.

  • That’s probably not a good reason but companies with a foot in Switzerland pay taxes here, which contributes to my well-being so I’d rather advantage them over others.

This exposes me to concentration risk and I may be in a really bad position if things turn south in Switzerland. This is where physical gold comes handy to try to pass the border and start again elsewhere.

That being said, I’m a strange person and have a different viewpoint on risk assessment than most. :wink:

Edit: though my plan past a certain networth would be to build meaningful relationships in another country and buy some assets there. The relationship with the locals being the key to an additional layer of protection while still allowing for some (limited) amount of (low) diversification.

This question is bound to lean to responses that imply performance chasing. Post the last 15 years, it was simply too easy to overweight the world and/or the US.

Before we answer this question, we need to have a look at the long term picture beyond this mega bullrun and performance chasing. And from there, we need to remember that:

In such context, I would recommend anyone to augment a World Portfolio with at least 20% in Swiss Shares, and at least another 5% in Europe ex Switzerland. Personally, I further hold a few percentages in World ex US to offset US Risk (Valuation and Political), but thats a Personal twist. In this context, we could use these twists to as well diversify from Ireland ETF domiciles and/or ETFs as such (how about Index Fonds?).

With 75% World, 20% Swiss (SPI Extra Overweight and some SLI to break megacaps) and 5% Europe - this still provides for ~ 40% US exposure. Meaning that this still was a fairly risky exposure.

Efficient Market Theory would call for a solution where we took a passive World Index to determine Sector and Factor weightings and the implemented a Country Exposure reduced, Global Portfolio that retained the same Sector and Factor exposure aka e.g. Equal Weight North America, Europe and Asia and use Sector / Factor Funds to offset resulting changes in Sectors / Factors back to a World Allocation; this with EM still at Market Weight. Unfortunately, such Portfolio is challenging to implement unless we talk about very large portfolios.

BTW: Efficient Portfolios are not nescecarily the ones with the highest return. US Overperformance from the last 10 years was a matter of sectors (which is good) but as well a matter of the fact that the idiosynchrotic political risk a World Indexer takes has payed out. This risk could somewhen as well not pay out. We know that the market in the long run doesnt compensate for idiosynchronic risk taking so we should avoid those whenever we can - even if it means we sacrifice past returns aka past good luck. Do not chase performance!

2 Likes

Do you have any source article for this?

I’ve seen in a few posts you are negative on US, I’m interested as it seems a bold contrarian move to underweight US / over weight Europe.

Shiller PE Ratio

Valuations went up from 15 to 40 in the last 10 years.

1 Like

I agree stock valuations are stretched

However without looking up precise data an investment in Sp500 10 years ago has increased 4 fold or more whilst Euro stoxx 600 <2 fold. That difference is too big to be market inefficiency alone

Part of the higher return is underlying value generation - US innovation is creating companies that are dominating the world. US Companies we said had crazy high valuations 10 years ago now have huge profits (for example Facebook). Growth prospects are also higher than for European companies

Buffett said recently never bet against America. Betting against Buffett is rarely going to work out well…

Scroll to the „WINNERS, LOSERS, AND THE CASE FOR OWNING EACH“ article, before things are a bit blah blah.

My Pitch is NOT to overweight Europe, my Pitch is to underweight US (aka overweight ExUS) and re-adjust sector and factor exposure to offset this shift to the extent you can.

My view is that many folks get the Efficient Market Hypothesis wrong. We get Market Returns when we diversify and our exposure to Sectors and Factors equates to their respective All World weights. Jurisdictions are no Factor as such and, at least when we talk Global Corps and not local businesses, they don‘t constitute a Market either. Meaning that exposure to Jurisdictions won‘t drive systemic factor returns nor does it provide for rebalancing benefits we get if we invest in different sectors. Therefore, Jurisdictional Exposure mainly equates to idiosynchronic risk that we take, but don‘t get compensated for. Therefore, I propose to cut down the US Jurisdiction risk.

With any idiosynchronic risk we take, we need to be aware that pre cost, we have a 50% chance that it adds value, and 50% that it destroys value. Given its idiosynchrotic, we however know that in average and over an infinite time we won‘t make any extra money.

Conclusion: don‘t invest too much in the states, even if it over the last 10 years payd out to put your casino chips to red - no one knows how long that continues.

1 Like

Thanks. As said above I agree that valuations are high but the GMO article itself acknowledges that part of the excess return from US stock is due to higher value generation vs. ROW

Well, the guy is 91 years old. Chances are he won‘t even be sitting on the table anymore anytime soon, to take your bet.

The United States are going to have another presidential election in 2024. And Trump‘s considering running again. If that turns into a close race and Trump‘s about to lose by narrow margins, things may (IMO probably will) get very ugly. Even if Trump is elected squarely, there‘s a good chance it will. And I have my doubts whether this time his running mate will (again) turn out to be god-fearing conservative but ultimately honest and upright as Mike Pence.

1 Like

My intent is to shake a few carved in stone views. Hence the black and white sentence that all of the US‘s overperformamce was due to higher valuations. That is not fully true.

The article however states that:

  • Japan had equal fundamental performance than the US; yet US Valuations went ahead
  • European fundamental performance until 2019 was until about on track with the US one; there was a gap since that which is probably due given different sectors. US valuations yet already skyrocketed before

The fair and unbiased summary on the article is that US had ~ 40% higher growth in fundamentals yet ~ higher valuations than rest of the world. This 40% may simply be good outcome of the non-compensated for US Jurisdiction risk and it may likely revert back to the mean somewhen.