We use a detailed panel data set of Swedish households to investigate the relation between their labor income risk and financial investment decisions. In particular, we relate changes in wage volatility to changes in the portfolio holdings for households that switched industries between 1999 and 2002. We find that households do adjust their portfolio holdings when switching jobs, which is consistent with the idea that households hedge their human capital risk in the stock market. The results are statistically and economically significant. A household going from an industry with low wage volatility to one with high volatility ceteris paribus decreases its portfolio share of risky assets by up to 35%, or $15,575.

ABSTRACT This paper investigates value and growth investing in a large administrative panel of Swedish residents. We show that, over the life cycle, households progressively shift from growth to value as they become older and their balance sheets improve. Furthermore, investors with high human capital and high exposure to macroeconomic risk tilt their portfolios away from value. While several behavioral biases seem evident in the data, the patterns we uncover are overall remarkably consistent with the portfolio implications of risk‐based theories of the value premium.