You probably have a preferred bank to serve your banking needs, but when it comes to investing in S&P/ASX 200 Index (ASX: XJO) bank shares, it often doesn't pay to discriminate.
This is why I have all four of the ASX big banks in my portfolio despite the fact that some have brighter prospects than others.
But experience has taught me that trying to pick the winner from the group can be a counterproductive exercise. This is particularly so for longer-term investors.
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Spreading your eggs across ASX 200 bank shares
There are two key reasons behind my thinking. The first is to do with risk – something I look at as much as returns when it comes to investing.
There are two kinds of risk an ASX investor faces. One is systemic risk and the other is non-systemic risk. The former refers to broader market risks (such as economic cycles), while the other refers to the risks facing individual companies (like loss of market share).
It is the latter that prompts me not to keep all my eggs in one ASX 200 bank share. In any case, different banks tend to outperform over a specific period. This complicates the task of picking winners for more passive longer-term investors.
Portfolio positioning
For instance, the National Australia Bank Ltd. (ASX: NAB) is the top performing ASX 200 bank share over the past year. But it's Commonwealth Bank of Australia (ASX: CBA) that is leading the pack over a five-year period.
However, I invest more in some of the ASX banks to gain leverage to certain shorter-term thematics. In other words, you don't need to have an equal weighting for all in the sector.
To be sure, I didn't start off this way when I only had a modest amount to invest. It just doesn't make sense to be spread too thin. But as my portfolio (and capital base) grew, the strategy had to evolve.
How I pick the big 4 ASX 200 bank shares
The second reason I own all four big banks is because of the way I pick shares. I am usually a top-down investor when it comes to large caps and a bottom-up investor for small caps.
The former means I look at broader economic factors first when deciding to invest at the top end of town. The latter refers to picking shares primarily for company-specific reasons.
Top-down works better for me when it comes to the banks because choosing one large cap over another can often be akin to splitting hairs. I typically use the same approach when it comes to the iron ore majors too.
If I have a positive view on a sector due to the economic cycle, I am better off buying most or all the leaders in the field.
Can't ignore the laggards
This includes the laggards (unless there is a significant non-systemic issue). In the case of ASX 200 bank shares, the laggards are Australia and New Zealand Banking Group Ltd (ASX: ANZ) and Westpac Banking Corp (ASX: WBC). I am ignoring the regional banks as that's for another article.
There's no doubt that holding these two ASX 200 bank shares have dragged on my returns in the last year. But it's a price I am happy to pay to sleep better at night and they could very well come back into fashion next year.
