The Commonwealth Bank of Australia (ASX: CBA) share price has performed strongly for many years.
CBA Share Price
As can be seen in the chart above, shares in Commonwealth Bank of Australia (the blue line) have been a standout. In fact, they have performed much better than National Australia Bank Ltd. (ASX: NAB) shares, with Australia and New Zealand Banking Group (ASX: ANZ) shares and Westpac Banking Corp (ASX: WBC) shares also struggling to keep pace over the past 18 years.
But whenever a company has performed as well as Commbank has, investors can get a little nervous. Will the share price fall? What's happens if a market crash is around the corner?
I'm sorry to tell you but no-one knows the answer to these questions. Not even the analysts who are paid $300,000 per year to make Excel spreadsheets look sophisticated.
The only tried and true method of consistently making money in the sharemarket is understanding the companies you are invested in and thinking about their profitability over the long-term.
Of course, a prudent investor will also be aware of a share's valuation and the risks and red flags as part of building their understanding of the business.
In my opinion, one of the key risks facing Commbank is a housing crash, which would be disastrous. But that risk could perhaps be considered a low probability, so the chances of picking the point before a market crash is near impossible.
Unemployment is another big risk because it affects affordability. Fortunately, although our economy has its challenges, unemployment appears likely to remain mostly stable — unless we suffer an unforeseen economic impact.
Moreover, the risks associated with increasing regulation, competition and dividend cuts could just be temporary. But shareholders should consider them on a regular basis.
Foolish Takeaway
Because no-one knows for certain when a market crash will come, we can only prepare for it psychologically and by maintaining a prudent level of diversification. That means, if you have more than, say, 30% of your portfolio in bank shares, it may be time to consider other ideas.
As I wrote recently, at these levels, CBA shares are too expensive to justify a buy rating (in my opinion). But that does not make them a 'sell', either.
