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While many may argue that no financial portfolio could be complete without a bank stock in it, there are reasons for and against the inclusion of banks.

On the ‘for’ side, given banks are weighted so heavily within our indices there is a ‘risk’ from not holding them. This risk is a concern for anyone looking to mimic the market’s return.

On the ‘against’ side, the riskiness of a bank’s business model and their complex accounts which are close to incomprehensible for most investors, coupled with their current lofty valuations leads me to suggest it is acceptable to steer clear of them.

As an alternative to owning a bank consider listed investment company Argo Investments Limited (ASX: ARG). Argo not only provides shareholders with a solid dividend yield and exposure to banks – its largest single holding is Westpac Banking Corp (ASX: WBC) – but it also offers market-like returns.

Within the financial sector, Argo is classified as a member of the capital markets industry. Another company which hails from this same industry is financial services provider IOOF Holdings Limited (ASX: IFL). IOOF incorporates a number of high-quality businesses including its funds management arm Perennial. With good growth prospects, a forward price-to-earnings ratio of 16.2 and a forward dividend yield of 5.5%, IOOF looks enticing at current prices.

Another company with appealing attributes which is classified under the industry grouping of specialised finance is ASX Ltd (ASX: ASX). The ASX continues to develop new products to offer through its exchanges and is an obvious participant in any future consolidation of regional stock exchanges.

Property companies are also important members of the financial sector. Two companies which investors should have on their watchlists are Lend Lease Group (ASX: LLC) which falls within the real estate management & development industry and Stockland Corporation Ltd (ASX: SGP) which is a good, old fashioned real estate investment trust (REIT). Both companies have good long-term prospects and offer exposure to property assets and development opportunities.

Foolish takeaway

Some financial businesses have superb leverage in their business models which can make it seem like you own a money-printing machine. Identifying stocks with these attributes and making them core holdings in your portfolio can turn out well provided you purchase at the right price and the companies selected have rock-solid balance sheets.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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