The #1 Banking Mistake That Costs Investors Thousands

This week on the Talking Wealth Podcast, Janine reveals the biggest mistakes investors make when choosing between cash and bank shares. Discover why buying bank stocks doesn't automatically deliver income or growth, and learn a simple strategy to help you decide when to invest in shares and when cash may be the smarter option.

• 0:01Speaker 00

  This podcast is brought to you by Wealth Within, a global leader in stock market education. For more information on our courses, head over to wealthwithin.com.au. Please note that the information in this podcast should not be considered personal financial advice. Enjoy.

• 0:20Speaker 01

  Hello and welcome to Talking Wealth. This is Janine Cox, Senior Analyst at Wealth Within. Today, I wanted to talk to you about one of my favourite subjects, which is banks. Now, the biggest bank investing mistake that most people make is all about the timing of when they're choosing to buy shares, how long they hold, and also, one more, there's actually three, it's choosing cash over shares at a time when the shares are actually going to provide not only a yield from the dividend, but also good growth. So how do you actually do that and get the best out of banks? How do you avoid the mistakes that people make

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  when investing in bank shares? How long do you invest in them for? When should you buy? When should you get out? And do you need to watch things like the interest rate cycle, credit quality, all of the metrics that professionals buying banks do? Now, we know that banks have long been a favourite among Australian investors, but buying a great bank doesn't always mean that you're getting a great investment. Consider NAB. There was a time when National Australia Bank was in forming a long-term sideways move. Investors were totally unaware of that unless they were looking at charts, but it did nothing

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  all that time. So for 10 years, you could have been in the bank and had the same value of your investment, which is, seems crazy, doesn't it? And you don't want to be stuck in those situations, thinking that you're just going to buy and hold when you're really not getting value for your money. So we're going to explore some of the key metrics that the analysts who look at fundamentals use to value banks. We're going to also look at what you can do to actually improve your timing. So Australian banks are trusted with trillions of dollars in deposits. Think about that. Millions of Australians own bank shares directly or even through their super.

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  Now, should you be a customer and walk in the door of a bank and put your hard-earned cash there or transfer it across online? Or should you be a shareholder or both? Now, it's a big question, isn't it? How do you make that decision to switch from your term deposit into bank stocks? When you know that there could be a risk to your capital? It can be stressful for some people. It's not an easy decision to make if you feel like you don't know enough to make that decision. Now, the other side to it, it's buying the right bank. How do you buy the right bank? One of the biggest mistakes is buying the right bank but at the wrong price or the wrong time

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  or completely getting it wrong and buying the wrong bank because you like the bank or you bank with them. That's not the basis for a good investment decision. So investors often pile into banks. So banks often have what we call rallies, a strong rally in price. And these are huge opportunities, but often when investors are hearing about banks, it's when the rally is either partway underway or it's towards the end. Funny about that, isn't it? There's no coincidences there. So this is where the charts allow you to have a window into what's really going on. Now, the reason these strong rallies occur is because we start to see investment pick

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  up in the banks, that the stocks all of a sudden become valued as undervalued or cheaper, considered cheaper. And I don't really like using that word, but that's often what gets thrown around. And then all of a sudden, those in the know are piling into banks and you can see volume pick up. You can see the share price start to accelerate, but often they're still talking doom and gloom about what's going on with the banking sector or the economy. And so most investors are not really getting the true benefit out of that that they could be. So investors tend to look at banks to chase dividend yields. And at times, yields can fall when share prices are elevated.

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  However, banks typically pay at the market average and can often pay slightly higher. So I mean, that's where you want to be looking at if you're looking for dividend income. Banks are a really great place to start, but not when you're potentially risking your capital. Because banks can go into long term declines. We've seen that before on a number of bank stocks. Not so much with Commonwealth Bank, although you'd be surprised at how much Commonwealth Bank fell during the financial crisis. No stock is immune from that. It's just a question of when do you put your money into the banks and when do you take your money out?

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  Now, a lot of you will have seen Dale talking about his book on our show. So if you haven't checked out our show, make sure you put it on your list of things to do. And also grab yourself a copy of his book. I can't recommend this highly enough. If you want to make sure that during the next crunch or in any crunch in a market, that you actually know when the highest risk time is to be holding banks. I'm not talking getting in and out and trading regularly. What I'm talking about is being able to apply some of the techniques so that you can get in it at an opportune time and then ride the trend could be possibly for a number of years. And then realise that the risk is getting too strong.

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  The technique will show you how to get out and it's really so simple. I remember we had a client that came up to Dale and he said, I can't believe that we didn't learn about this technique, you know, in school. It's just such a simple thing and it can protect your investment and your family's wealth. Now, the next thing is cash versus shares in the bank. Now, when should your money stay in the bank? And when should you start considering to move it out?

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  When interest rates are high, term deposits look really attractive. But when inflation is high, it doesn't matter what in interest comparing investment that you have. It's not returning you anything much. So say, for example, inflation's kicking on around 4%, 3. something or 4% at any point in time. We'll choose four. It's been up, you know, and down over recent years and we've seen it go even higher. But let's just say 4%. Now, if you're getting a return from your cash in the bank of around 5%, then really all you're making above inflation is 1%.

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  Because what's happening is when you go to the supermarket to buy your groceries, all of a sudden you're paying more for those groceries based on the inflation rate. So prices are going up and sometimes prices are distorted. We find there was that whole scenario where consumers were angry about what the supermarkets were doing with pricing. And it's not easy for supermarkets either. You've got to bear in mind when things are fluid and it's changing. But what you can do is actually be ahead of the game and just be aware. You don't need to be a financial analyst to understand it, but just to be aware that

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  when inflation's rising, that can actually be a really good time to be in bank shares. Because not only do you get a dividend of around 4% or more, you get some capital growth. We're more likely to see that rise during those times. So cash may be more appropriate if interest rates were really, really high. So we're talking if the cash rate got up to 6% or 8%, you might think, okay, potentially it's worth putting some cash in a term deposit.

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  But at that time, markets would actually potentially be expensive. There would be conversations about bank shares looking to be expensive. We've seen bank shares get sold off recently.

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  From time to time, you will be able to observe that. You can just go on any website, a broking website, Comsec website. ANZ have a broker as well, Westpac. All the major banks provide broking services, even through third party providers. But you can also get access via websites like Market Index to have a look at the chart. If you don't have your own charting package and you're not a trader, you can go online and see, well, where are banks trading right now? And if they've been pulling back, often banks pull back around that 20% market, then they take off again.

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  So the timing of your decision making can be based on when banks look less expensive. But there are catches with that as well, and I will get into that soon. But you've got to look at what cash provides. Cash provides you with certainty and some growth over the long term if you choose to leave it there. But of course, interest rates change and so do cash rates change. But it was interesting to see how many or talk to people who had their money in the bank. When the cash rate had dropped right down and the term deposit rates were really low

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  and they were still leaving it there, getting nothing almost because of fear, a fear of the unknown. They probably would have liked to put their money into bank shares. And then when the cycle turned and the banks went up 20, 30, 40%, that's what you're missing out on to try to get, you know, maybe three to 5%. So it's well worth looking into, given that the difference between what you'll get in the bank and what you can get from the shares could be 10 times that. Now, they look at metrics, professionals are always talking about metrics with banks, you know, the valuations, price to earnings, their book value, comparison with historical

• 10:57Speaker 01

  averages, they look at dividend yield, payout ratios, and the sustainability of those dividends. The only time that I can remember a bank not paying dividends was in the GFC, and there was a period, short period, where the uncertainty was so high that they actually stopped paying, which came as a great shock to investors. So don't ever think that a bank will just keep paying you dividends regardless. There are times when they do stop.

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  Now, earnings, obviously a high net interest margin is one really important metric, and it's the profit that a bank can make over and above what they pay. So it's the difference between what they pay out to investors who are putting their money into term deposits and the people who are paying interest to the bank. So generally, banks run around, ideally around 2% is a good number for banks. So that's something to keep an eye on as well. But do you really need to look at all of those things? Do you need to be a professional to make a decision about when to buy bank

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  shares? And the answer is no, you don't. You could just buy bank shares and every now and again, put a thousand dollars into a few bank stocks and build your portfolio and bank shares up over time. That's a really good way to do it. Or you could be more strategic with it. Because if you make the mistake of buying bank shares at a market peak, and even after a market peak, when the stocks have pulled back and you all of a sudden think, oh, these bank shares look a lot cheaper than they were in the last 12 months. That's often a rule that people use, believe it or not, because it gets talked about out there. Because the industry try to keep it simple for you.

• 12:54Speaker 01

  But really, to me, they just make keeping you dumb by doing that. And please excuse me for saying that. If you are educated, then that's not the case. But if you have no, no knowledge on how to buy bank shares, then you really need to fill that gap and get some knowledge. And Dale's book is a really great place to start. Gives you a simple rule. You can actually print out a chart and just draw a line on a, on a piece of paper. How, how easy is that? But that could be the difference between watching your bank shares for 50 or 60% and actually sitting on the sidelines in cash, while other people who didn't do just a little bit of research are going to be really distressed.

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  You won't experience that if you actually make some good decisions now in terms of your understanding. It's just knowledge is the difference between being in that position and not. So the next thing is the interest rate cycle. Rising interest rates can initially benefit banks because they will get the difference between,

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  it's a net windfall to them, obviously, if they increase borrowing rates and they haven't actually increased the term deposit rate for you yet. If you've got your cash in the bank, you know, I often hear people saying, oh, I'm waiting to see if the bank's going to increase my, my interest on my term deposit account.

• 14:23Speaker 01

  But then you've got to wait because your term deposit might be locked in for whatever it is, 12 months and then wait to get that next round of opportunities. So that's the other side to investing in cash is you're still making decisions about timing when to lock in to a term deposit. And it could be at the wrong time to do that.

• 14:44Speaker 02

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• 15:06Speaker 01

  Next thing, credit quality. It's often talked about and you won't really know whether there's an important flag as an individual to be watching there, other than when the media starts to really ramp up the discussion on it. And then the conversation on credit quality will die off. Banks will start to rise strongly again. And then it will be at that next boom part where the banks have accelerated in price, where people have forgotten about credit quality or it'll be drowned out in the noise of people thinking about how much they've made and not listening to what's going on. And that's what happened during the GFC.

• 15:53Speaker 01

  You know, maybe you did too. Maybe you were holding on to your bank shares for dear life because they'd gone up substantially and you were still getting some dividends out of them. And in all that time in the background, as the market had got towards that top, there were conversations about what was really going on underneath in the economy and with the property market. So is it all worth it? Well, think about it. Four percent versus potentially thirty, forty percent. If you can time it right. And that's the question, isn't it? But I have to say that banks are actually easier to make returns on than most other stocks because of the way that they trend. That's an important fact.

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  So know how a bank trends. Know how to recognize whether it looks like it's turning a bottom. It's, it's interesting turning at a bottom, I should say. Most people can actually see that on a chart, even if they haven't done technical analysis before. You can look at a chart and say, well, okay, that's, looks like it's turned a corner. Is now a good time to get in? Well, that depends on whether the trend has been broken and whether it's changed, actually confirmed something about changing direction. Not just, oh, it looks like it's changed direction. You need to actually have a metric to use, which the book clearly goes into and helps you work through. So the other thing is, how long should you hold for? That's a big question.

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  People often make that mistake of thinking just to buy and hold forever. But if our market took 10 years to recover after the GFC and banks are a substantial part of that total capital, therefore they're often the drivers of what our market looks like. And so therefore, a long period of time in holding banks, you know, could be that you're in that situation where they've done nothing and then you're watching other stocks in the market do really well, or your bank shares are not performing. But eventually they'll come back. Someone said to me a long time ago, and yes, that's so true. But how long will they go down for?

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  Now, a lot of people underestimated what was going to happen with BHP and Rio. BHP and Rio, big stocks, went into a long-term decline and, and didn't come out of that. They went all the way from 2011 to 2016. That's five years down and a significant fall of that. And the share prices took until 20, I think it was 2024, before they got way back above that prior high. And that's a long time. The way it might have been initially spiking above it earlier in 2021, but, and then sideways and doing nothing for many years. So.

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  It is a timing issue and that's where a trend line is really your best friend when it comes to banks and knowing when to be in there at the right time. After all, it's just like watching the bouncing ball. I described it to someone that way, that as it rises, you're watching it go up, it pulls back up, back, and it's like a stepping stone. It's stepping up as the trend is moving up and you're just following it with a line. Basically, that's really all it is. But knowing how to draw that line, there's a few key tips that the book gives you to do that. Now, if you really want to get skilled at this, then you would take it to the next

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  level and look to study one of our courses to really prepare you to make the most out of banks. And it may be that at some point you will put your money back into a cash account. Once you've actually got a capital return out of the banks and they're showing that they've turned a corner, take the funds, put it back into cash and you might be leaving it there for some months. You might even be able to put it into a term deposit for a number of months and then wait until the signals occur again to tell you that the trend has changed again. Okay, time to move money out of there and put it back into banks again. Now, with banks, when should you sell?

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  Now, professionals look at it this way, they're looking at the fundamentals. Have the valuations become excessive?

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  Has the earnings cycle peaked? What's happening with economic conditions?

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  You know, credit quality, what's happening with bad debts?

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  These are all things where, that the professionals are looking for. Do you need to look at those? No, it makes interesting reading to understand what's going on in the industry. You know, but you don't need to be an economist and you don't, definitely don't need to be across all of those things to know when to sell. It can be so simple and people often don't believe how simple it actually can be. So the biggest mistake I would say in all of that is not necessarily when to buy, although they say that that's the most important thing to do is when you buy. But even if you did buy at slightly the wrong time, the biggest mistake is to, to buy and hold thinking that you'll just sit there and the, and the, and next to that, um, having

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  no idea about when you're going to sell, when it's so simple to do. Now, why timing matters? Well, there are cycles on our market. It's a proven thing. So if you're, if a stock is near a market low, you can get some strong, long-term returns from those stocks once they start to turn back up again. Banks are really good at showing you that. Now, when they're near highs and they're starting to weaken, performance starts to disappoint, then the trend will start to break down a bit. But it doesn't initially fall straight back through the, the angle of that trend. It often will just come back to the angle of the trend and give you a number of tests before it actually goes through it. But it gives you signs all the way through.

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  It's not like you have, with banks, you know, if you'll be looking at these long-term, you're not having to sort of look at it every day and wondering whether your bank shares are going to be okay. That's just not, um, a reality, but it, but you are made to think that that's the case. You know, so I think, I think a lot of people have actually been deceived. So another mistake would be to actually believe that, you know, you have to check your shares every day, that you could lose the lot. It's highly unlikely that that will happen and there will be many signals for you to exit before, um, a big meltdown occurs. If you just take the GFC and you look at what happened during that period, even in the eighty-seven crash, there were signals to exit.

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  Even if we go right back to the late sixties and early seventies, the same thing, you'll see plenty of them. So, and you can identify them because it's just a picture. And when you've seen something a few times, you'll start to recognise what you're actually looking at. It's just like when you look up at the sky and you see that there's dark clouds coming. You know that there could be rain, but you're not sure whether it will rain. But then you feel the drop in temperature. That's usually a high probability sign. The wind picks up, you're feeling that chill, you know, all of these things. There are criteria that you can identify like that to determine whether a stock, a bank's stock is more likely to pull back.

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  So with professional investors, they're not buying the banks because they're household names. They want to make money out of them. They've got a certain target to get a return out of these banks. It's not just to hold banks for the sake of it. Although there are funds that have to hold banks because they are index funds and they have to include a certain percentage of all of the major stocks within their fund. It could be the mandate that states that they actually have to hold banks. So just really be aware of those situations. Now, as I said before, there are levels where dividends are going to actually cause, you know, we'll get to a certain point where it'll cause the flow of funds to increase into,

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  um, bank stocks. When the dividends are up around, you know, five or six percent, more money moves into those bank stocks because they're chasing those dividends with the potential to get some capital growth. So there are some stocks that at times will have higher yields than others. And that could just be because they've got a higher payout ratio. It could be where they're trading at the moment relative to where they were trading previously. So they might have, as shares fall in value, the yields can go up. As shares are rising, the yields can drop. We saw Commonwealth Bank yields drop down to significantly low levels relative to its historic yield.

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  As it continued to rise, as the share price pulls back, those yields correct and and the yield pops up a bit. So a higher yield, does that automatically mean a better value? No, it often means that the share price is falling or it's undervalued. It could, if there's a lower yield, the opposite is true. It could be a stronger investor demands driving the price higher and therefore the yields dropped off as the price goes up. So there's a lot of things to consider there, but it's about cutting it back and keeping it simple. That's the key thing here. So investors are often told about bonds

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  and it's suggested that you should move your money into bonds at some point. Professionals do it. Should investors do it? You don't have to. Whatever you put your money into, you need to have a good understanding of. If it's shares, you need to understand that the bank will pay dividends a couple of times a year. Really important to know when those times are, to know when reporting season is because you will expect some volatility in the share price, either down if the bank disappoints the market or up if it's within

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  guidance or even beats expectations on the forecast. So, you know, there are explanations, but these all make us feel better about where the banks are trading in the meantime.

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  Now, if we think back, you know, to why people held banks long ago, it was all about security, you know, holding bank shares less risky than holding other stocks. And look, that would still be true today, but don't bury your head in the sand thinking that you can just hold them through any cycle up and down.

• 27:00Speaker 01

  So I think we've covered a lot so far in terms of the fundamental aspects. Now with bond yields, that's a different thing altogether. You could really summarise what I've just talked about into a couple of key areas. Dividend yields shift due to a number of reasons, you need to understand that. Due to the share price movements, interest rate expectations.

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  Things like the housing market and credit and bad debts. Because it's related back to the share price. So you need to know that when a dividend is really high, it could be because conditions have deteriorated. As the dividend drops off, more than likely the share price is rising.

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  Banks, as I said, offer between, it could be three and a half, up to 6%. And they're fully franked. So depending on your tax position, that can be a really nice little earner for somebody who's on a, on a low tax rate. So, you know, there's a lot of arguments for either side. But if you're after a better return, you've got to be in the bank stock. If you want to be in bank stocks, you need to know how to apply a simple rule like a trend line to keep your money safe.

• 28:24Speaker 01

  And as far as bonds, well, they say you can shift over to bonds, but make sure you understand how bonds work. It's really important, you know, to, to understand that. And it's all, all a question of risk when money moves from one asset to another, when it moves from cash to shares and shares to bonds or cash. But it doesn't necessarily mean that your bonds are safe. It depends on what bonds you're invested in. Government bonds are considered very safe, very low risk guaranteed nominal return. Paying somewhere about four and a half to, to 5% could be quite normal.

• 29:08Speaker 01

  So it's sort of in line with what you'd expect to get from your bank shares and banks could be slightly higher than that. Plus you've got the benefit of capital growth, plus you get franking credits from your bank shares.

• 29:23Speaker 01

  Now, the housing market and all these other things, you can read things in the news, but sometimes there are articles written which cause more fear than really give you factual information that can help you. So just really be aware of that. Don't pay too much attention to that. Always come back and look at the price chart and what it tells you. So I would say that if you're looking to invest in a bank, don't just pick the bank that you deposit with. You would look at all four banks, the big four, and

• 30:01Speaker 01

  it's quite great that you only have to look at four to choose a bank. ANZ, Combank, Westpac and Neb. You might choose Macquarie. Macquarie can tend to be more volatile than other banks because it's an investment bank. That's something to be aware of. But Macquarie's also quite good as well. It's had incredible growth and was actually one of the best performers on the market prior to the GFC. Trend lines again would have protected you and your investment with Macquarie. So, look, I hope that I've covered off enough to help you really understand what some of the issues are when looking at bank shares and what you can do to actually

• 30:42Speaker 01

  assist yourself to be in bank shares at the right time. It's all about the trend and trend lines guiding you as to what's going on and where the money's flowing. It either goes up with the trend and you put a line up underneath the trend. It goes below the trend, then you're getting out, put your money in a term deposit. And then when the risk scenario has changed and it goes up again and you get another opportunity to buy above a trend and trend line, then you can get back in again. And you can do this over a long-term chart. We're not talking daily charts. You can do it on weekly charts, but you don't

• 31:27Speaker 01

  have to. You can do that over the larger timeframe. If you want to learn more, remember, grab a copy of the book. You might also want to talk to one of our education consultants about getting serious in terms of how you're managing your risk. There's not a better time to be doing that than right now. I'm Janine Cox, Senior Analyst at Wealth Within. Bye for now.

• 31:52Speaker 00

  This podcast is brought to you by Wealth Within, a global leader in stock market education. For more information on our courses, head over to wealthwithin.com.au. Please note that the information in this podcast should not be considered personal financial advice.