Banks: Systematic & Non-Systematic Risk
Posted on Thursday, May 29th, 2008 | In Current Market News, Funds to Watch, Investing LessonsLarge banks are way down in the past 12 months, and as a consequence their trailing yields are well above normal. That potentially creates substantial long-term equity income opportunity, but the big question is whether the dividends that make those yields will hold or be cut.
If you subscribe to the “buy it when it’s cheap” philosophy, then you really need to evaluate any sector when it sinks the way large banks have done.
If you conclude that taking a position (partial or full) in large banks is the right thing to do, we believe that you should buy the sector, not individual banks (unless you have high research-based conviction about the individual company).
If you buy the sector, you are exposed to systematic risk for banks (general market risk and industry specific risk, such as more mortgage market trouble). You would probably hold some stinkers in the group, but you would also hold the winners. That means that a few banks with negative surprises will not destroy the income advantage of the sector.
If you buy inidividual banks, you take on systematic market and systematic sector risk, but also non-systematic (individual company) risk. With individual banks, you have greater risk of permanent capital loss (some banks could fail), greater price volatility risk, and greater risk of yield reduction through dividend cuts.
Two good ETFs to participate in large banks are XLF (S&P 500 financials sector, which also includes insurance and investment banking) and KBE (KBW large bank index).
Last 5 posts by Richard Shaw
- Quality Individual U.S. Companies - November 7th, 2009
- “China Up / U.S. Down” Theme Checkup - November 2nd, 2009
- Healthcare Co. Profits Sensitivity to Obamacare - October 29th, 2009
- Less Than Good News from Germany - October 25th, 2009
- U.S. Budget Debt History and Projections - October 24th, 2009
bank index, Current Market News, equity income, Funds to Watch, Investing Lessons, Investment Banking, Market Risk, Mortgage Market, price volatility, systematic risk, volatility risk, XLF
 About Richard Shaw (http://www.QVMgroup.com)
Richard is a principal of QVM Group LLC, a fee-based investment advisor based in Connecticut with clients across the country. He provides investment coaching to "do-it-yourself" investors, and manages portfolios for those who prefer not to make their own decisions. His investment approach is based on value, asset allocation, benchmarking, expense control, risk management, customizing portfolios to each client's specific circumstances, and regular communication about strategy and performance. The QVM Group team also provides municipal refinance services, strategic business planning and financial analysis service for new ventures, private acquisition analysis, and custom investment research. Richard's extensive experience, includes serving on the Board of Directors of Aberdeen Asset Management PLC (London Stock Exchange: ADN), membership on the Board of Directors of Phoenix Investment Counsel (renamed Virtus Investment Advisors), a U.S. pension manager and investment advisor to the Phoenix Funds (renamed Virtus Funds), as well as serving as Managing Director of a series of offshore investment funds based in Luxembourg. He has led institutional asset management sales and had overall responsibility for management of a U.S. mutual funds broker-dealer. He was a charter investor and member of the Board of Directors of several internet companies, including Lending Tree prior to its IPO. He is a graduate of Dartmouth College. QVM Group LLC is a Registered Investment Advisor. Visit the QVM Group website http://www.qvmgroup.com/QVMinvest/ |
No recommendations, either expressed or implied, are being made to buy, sell, hold or short any of the mentioned stocks. No legal, tax or accounting advice is expressed or implied. Always contact your attorney, CPA, or tax advisor before acting on any legal or tax issues. StraightStocks.com is not responsible for the content, products, or services of any of the advertisers on this site. StraightStocks.com receives compensation from advertisers on this blog. Services and products referred to herein are trademarks, registered trademarks, servicemarks, and/or registered servicemarks of their respective trademark or servicemark owners.