Sunday, 17 July 2016

All banks or 1 bank portfolio




Recently I had somewhat of a reunion with old friends from way back in the day, it must have been close to 2 years since us 3 had a chance to sit down and just chat.  Eventually the topic of money, investments, RRSP, RESPs, etc came up.  Well both have been aware of my financial blog and one of them has been hearing of my speeches of money for I would say 4 plus years now.  My constant ramblings back in the olden days mostly consisted of the evil Mutual Fund MER.  Well to shorten the story, he took an investment course and the instructor even had worse things to say about Fees, Life Insurance, Investments, mutual funds, etc.  It literally opened his eyes, short of acknowledging my ramblings all those years, he has switched.  Well not completely switched.  "No more new money into mutual funds" was his final statement.  He's almost there.  He asked me if I am out of mutual funds, I answered completely.  He's almost switched over, he's shocked about fees.  Self directed accounts is all he has now.  I've explained my rational of dividend investing among other topics like technical investing (50 day Moving average, 200 day moving average, P/E ratios, etc).  Baby steps, baby steps.  If my ramblings open the eyes of someone in my circle and they save money, then I will keep rambling.

Onto my 2nd buddy.  Let's just say he works at a big 5 bank and leave it at that.  His major holding is guess what, a big 5 bank.  Now the question to me was, he has had contributions to his big holding for many years now and it has performed for him.

Before we get into this analysis,  I want to disclose that I own 4 holdings in the banks.  Bank of Montreal, Royal Bank, TD Bank, and Laurentian Bank.  And as consistent with my previous articles, I own enough shares to drip 1 share with the exception of TD, which I drip 2 shares every dividend payment.

Canadian Banks are unique that they operate in an oligopoly, where the sheer scale of them makes it hard for any new entrants into this sector of the economy.  This could be described as a moat in my forever stocks post.  The Canadian banks have many revenue streams, personal / business lending, investment banking (discount brokerages), wealth management, and auto, life, property insurance.  The banks have many years of growth over the years and have provided regular dividend increases.

Now some numbers, I will compare the 10 year, 5 year performances for CIBC, Coke Cola, and Enbridge.  I will compare this to the TSX performance for the same period.

On June 30 for the years 2016, 2011, and 2006 for CIBC, the stock price listed on yahoo finance is $46.74, $60.45, and $97.04  This gives CIBC a 5 year gain of 68%, a 10 year gain of 107%.

On June 30 for the years 2016, 2011, and 2006 for Coke Cola , the stock price listed on yahoo finance is $16.02, $29.02, and $45.33  This gives Coke Cola a 5 year gain of 56%, a 10 year gain of 182%.

On June 30 for the years 2016, 2011, and 2006 for Enbridge, the stock price listed on yahoo finance is $12.33, $26.87 and $54.73  This gives Enbridge a 5 year gain of 104%, a 10 year gain of 343%.

On June 30 for the years 2016, 2011, and 2006 for the TSX, the price as listed on TMX money is 11,612 and 13,300 and 14,04  This gives the TSX a 5 year gain of 5%, a 10 year gain of 21%.

Investors have bought bank stocks thinking they provide the best returns so why not put my life savings  and invest it into 1 bank or only 5 banks.  This means if you have life savings of $600,000 you will buy only CIBC or split it 5 ways into all the banks hoping for the best returns.  Now the 5 year and 10 year numbers I've gotten show that CIBC destroys the TSX which is the benchmark for all investors to beat.  The 10 year for the TSX is 21% while CIBC clocks in at 107%.  It isn't a fair contest.  But if you wanted the best returns, why not put $600,000 into Enbridge, their 10 year is 343% which triples CIBC's stellar decade.  But no one would ever dream about just buying Enbridge.  Same holds true for Coke Cola.

Now to avoid diversification by buying only 1 bank or only the banking industry is just dangerous.  Granted, the canadian Banking industry is well regulated but the 2008-2009 financial crisis showed that banks can fail.  They failed in the U.S. and can fail in Canada.  There is still risk.  There are too many what ifs.  What if the housing bubble bursts, what if the global economy slows, what if interest rates are rise too fast.  What if.

Studies have shown that to get proper diversification you need 18 stocks across 18 different industries to be properly diversified.  Owning just 1 or just 5 stocks seems super risky.

Mutual funds have been saying it since the beginning of time.  Past performances do not guarantee future performances.  So to answer my 2nd buddy's question.  Yes it is risky to only own 1 bank stock or even own just bank stocks.  But if there is an employer matching to your contribution then some of the risk is taken away but there is still risk.

As a shareholder, I hope bank stocks keep generating solid returns and raise their dividend but I would never bet my entire portfolio on 1 stock or 1 industry.  That's why I diversify with telecoms, large consumer discretionary stocks, food stocks, chemical stocks, REITS, cigarettes, etc.  This type of portfolio will hold up better in a downturn then 1 stock or 1 industry.