Over the last 15 months or so, investors have recognised outstanding returns from the big four banks, having watched the shares climb around 50%, while also enjoying generous dividends. However, shareholders now face a tough decision: hold onto their shares and hope that high dividend yields continue to bolster the share prices, or sell their shares before they drop in value.
According to UBS analyst Jonathan Mott, Australian retail shareholders and domestic institutions hold around half a trillion dollars' worth of bank securities. He estimates that approximately $315 billion in equity value is owned by Australian households (whether directly or indirectly) and an additional $190 million worth of other securities, including bonds, are also owned by households.
Mott believes that one of the risks facing bank investments is that superannuation fund trustees and financial planners will review their portfolios and recognise the concentration risk in having such high exposure to the bank securities, which could then lead to profit-taking and the reallocation of those funds.
What's more, the Australian Prudential Regulation Authority (APRA) has outlined new rules that will require the banks to hold more in capital in case of a major economic downturn. Whilst that figure is believed to be an extra $14 billion between the big four and Macquarie Group (ASX: MQG), the banks could struggle to maintain their high dividend yields in the short- to medium-terms, which could then see investors sell their shares.
Collectively, Westpac (ASX: WBC), Commonwealth Bank (ASX: CBA), ANZ (ASX: ANZ) and NAB (ASX: NAB) have driven the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) to a multi-year high, pushing on the 5500-point barrier. Whilst it has been an impressive run, investors could feel the pain should the banks' shares start to fall away.
Here are three ways to assess your current position:
1. It is important to regularly assess your portfolio and determine whether you are comfortable with your fund allocation. For instance, if bank securities make up a large portion of your overall portfolio, you might consider reallocating some of that money to lessen your exposure
2. Diversify your portfolio across various sectors – weakness in one sector can be offset by strength in another sector. If you are looking for more diversification tips, you can find some here.
3. Maintaining a cash reserve is also important. Whilst I am making no predictions of a pending market crash, it is important to have cash stored away just in case. This can also give investors a great advantage in case something does happen, allowing them to buy stocks at cheaper valuations.
