Relying on the Big 4 Bank Shares for your income stream is risky business

As a financial adviser, I generally get into some interesting conversations at BBQs and dinner parties about people’s investment thoughts. One strategy comes up often, particularly with self-directed investors and it generally goes like this;

“I am quite risk-averse, so I only invest in blue-chip shares like the banks, they pay regular dividends. What do you think?” Now if I told them what I thought of that strategy I would most likely get into a barney, so I generally say that’s one way to invest, but I actually think that is quite risky.

As I am writing this article, we are in the middle of the COVID-19 pandemic, and the impact on the aforementioned strategy is front and centre. According to a recent ABC article1, up to $10 billion in income has been stripped out of the economy and the major banks are suspending or slashing dividend payments in response to a massive risk in bad loans and the risk of a property crash. The article goes on to paint a devastating picture. Already, well over half a million major bank customers with loans totalling more than $200 billion have asked to defer repayments. Add to that picture potential high unemployment and mortgage defaults and you can see this was not a safe strategy at all.

That is going to have a huge impact on my BBQ friend who now will have to sell shares at a great discount to fund their income requirements for quite some time.

An equity portfolio concentrated in Australia, heavily exposed to the financial services sector breaks all the fundamentals of diversification. A safe and secure approach to investing and producing income in retirement requires at least a 30% allocation to high quality fixed interest investments combined with a well-diversified share portfolio that spreads the risk not just in sectors but countries also.

Of course, I did not say that to my BBQ friend I just asked him to pass me a beer.

1 Posted 14 May 2020 – https://www.abc.net.au/news/2020-05-14/investors-to-lose-10-billion-in-bank-dividends-from-coronavirus/12243836.

Stephen Lowry (CFP® Professional, DFP, AIF®) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.

Performance data shown represents past performance or simulated performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.

Note: This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.