Recent research by State Street Global Advisors has highlighted that many Australian investors either through investments in managed funds or via balanced superannuation funds are overly exposed to the big four banks, BHP Billiton Limited (ASX: BHP) and Telstra Corporation Ltd (ASX: TLS).
All told, the four major banks account for around 30% of the index, with BHP and Telstra accounting for a further 8.5% and 8.8% respectively, according to an article published in The Australian Financial Review.
If it's not already, it should be a pretty scary realisation for many passive investors that most of their savings may be reliant on these six companies.
This would suggest to me that the single biggest risk for many Australian retirees is a change in the pricing of bank stocks. There is a long list of possible reasons why a de-rating of the banks could occur, including rising interest rates, a house price crash, regulatory changes and a financial crisis…to name a few.
A better alternative
While achieving the market return over the long term has proved a successful strategy, I'd argue that the best way to achieve this is by simply owning an index fund rather than a fund with high fees, which is also loaded with these six stocks. Using this technique should not only lead to lower fees which can help to boost total return but it will also mean a more diversified portfolio.
But even utilising a simple index strategy will still leave a portfolio overly exposed to the fortunes of just six companies. That's why active portfolio management and buying undervalued stocks either directly or via a carefully selected active fund manager is so appealing. As it can potentially lead to outperformance compared with an index hugging strategy.
That's why I'm not taking any chances with my retirement portfolio, I'm buying high quality, undervalued stocks with great growth prospects right now to give my portfolio the best chance of growing and outperforming over the long term. You can discover more here.
