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.
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