Australia’s Big 4 – the Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corporation (ASX: WBC), National Australia Bank Ltd (ASX: NAB), and the Australia and New Zealand Banking Group (ASX: ANZ) – dominate not only the banking industry, but also the ASX, being the 1st, 4th, 5th and 6th largest companies on the ASX by market capitalisation.
It’s easy to see why. Investors love to stick with what they know, and just about every Australian can recognise these banks’ iconic logos wherever they go. So, with impressive fully franked dividends ranging from 6.3% to 6.7% (market average of 4.2%), why do I think bank shares are such a terrible option for most beginning investors?
Changing our perspective on risk
“I’m just thinking of buying bank shares because I don’t want anything too risky”
Whilst it’s unlikely that our banks will be going out of business any time soon, it doesn’t mean that your investment will be immune to volatility. Banks exemplify the definition of a cyclical stock – as the economy slows and loans begin to decrease, it doesn’t take long before dividends are cut and the share price begins to dive. During the GFC, the Commonwealth Bank share price fell as much as 57%, debunking the so-called ‘safe’ status that new investors tend to give reputable companies. The impact of record low rates and the banking royal commission continues to put pressure on the banks, making it harder for them to issue loans and thus squeezing their profit margins.
Another good reason to steer clear of our banks is that you probably already own them. The Commonwealth