In recent months I’ve encountered more investors than usual who see Canadian big bank stocks as safe investments. I guess the most recent one was one too many for me. I don’t believe that there is such thing as a safe stock, and as stable as Canadian banks have been, this applies to their stocks as well.
Investors in Canadian banks have been rewarded with decades of stable dividends and fairly consistently rising stock prices. This may continue or it may not. The pressure of new online banks that don’t have the costs of physical branches may bite deeply into big bank profits. This isn’t a prediction. It’s just one possible future. I don’t know what will happen to big bank share prices or dividends.
Investing substantially all of your investments in two or three bank stocks may feel safe, but it isn’t. I’m not saying to avoid bank stocks entirely. Approximately 7% of my portfolio is invested in Canadian big bank stocks indirectly through Vanguard’s exchange-traded fund VCN. But this is a far cry from investing 80% or more of your portfolio in banks.
Diversification is your friend. Many investors feel safe invested in big bank stocks, but they aren’t really safe.