The Commonwealth Bank of Australia (ASX: CBA) share price growth has delivered good returns for shareholders in the past 12 months. CBA shares have risen more than 26% in the last year, plus there have been the dividend payments.
It's been a great period of time for the ASX bank share, but there's a big difference between the returns of the shares compared to the performance of the underlying financials of the bank.
It's rare for a bank the size of CBA to deliver capital growth of more than 20% in one year. Unless earnings grow at the same speed as the share price or faster, the price/earnings (P/E) ratio will increase, and the company will appear more expensive.
In my view, today's CBA share price valuation will either need to be justified by higher earnings or else there could be a pullback. Market volatility is completely normal of course, as there are always different buyers and sellers in the market. But what can we do to protect our portfolios from specific stock risk?
Diversification
I believe it's very easy to create diversification within our portfolios.
Diversification can help lower the risk of being too exposed to a particular business or sector.
If CBA was someone's entire portfolio and it dropped 20%, their portfolio would be worth 20% less.
If CBA was only 10% of a person's portfolio, a 20% decline in the CBA share price would only mean a 2% decline in the portfolio value.
Of course, that doesn't mean spreading your capital across Westpac Banking Corp (ASX: WBC), ANZ Group Holdings Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) because those other banks are in the same industry.
If I were buying individual ASX blue-chip shares, I'd look at names like Telstra Group Ltd (ASX: TLS), Rio Tinto Ltd (ASX: RIO), Wesfarmers Ltd (ASX: WES), Coles Group Ltd (ASX: COL) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) because they all offer different industry exposure to CBA shares.
Go global
An even better strategy to achieve diversification and avoid the risks of being overexposed to CBA shares is to invest in exchange-traded funds (ETFs).
ETFs allow us to buy a basket of shares in a single transaction. Each ETF has a different portfolio, so I think it's worthwhile being selective about which fund to go with.
If I already owned a lot of CBA shares, I wouldn't jump to buy Vanguard Australian Shares Index ETF (ASX: VAS) because it has a large allocation to ASX bank shares. I believe there are better options for diversification.
I'd look at globally focused ETFs, which, thanks to the quality of the underlying businesses, can provide both diversification and, hopefully, good returns.
Some of my favourites include VanEck MSCI International Quality ETF (ASX: QUAL), Betashares Global Quality Leaders ETF (ASX: QLTY), BetaShares Global Sustainability Leaders ETF (ASX: ETHI), and Vanguard MSCI Index International Shares ETF (ASX: VGS).
CBA is a great business, but there are plenty of others worth owning too, in my opinion. Choosing compelling global ETFs means we can spread our money across hundreds of businesses.
