It's time to bust the myth about investing in banks and miners


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Do two cornerstones of a typical portfolio still deserve their place?

Noah was a smart and well-connected bloke. Not only did he have a direct line to the Man Upstairs but he was a dab hand as a shipwright.

He could also have made a nice career for himself as a drummer, repeatedly counting to two as pairs of all of the animals of creation sauntered aboard.

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It was a fair effort, and perhaps one of the first recorded examples of the benefits of diversification. That said, Noah has a lot to answer for when it comes to spiders, leeches and a few other unmentionables. Would it really have been so hard to grab the unicorns and leave the funnel webs behind?

To some extent, Noah can lay some claim to be the spiritual father of diversification in investment, too. Or at least the way it's practised. Hearing the benefits of having a broad range of investments, many investors take the "two of everything" approach. Which sounds fine. Smart, even.

But that might be taking diversification too far. Many people, taking Noah's lead, look up the ASX indices and use that as a starting point. Consumer staples? Check. Telecommunications? Check. Energy and materials? Check. Check.

Through the list they go, doing a diligent impression of a hospital inpatient filling out the meal slip. Main meal. Dessert. Drink. Snack. They tick something in every category, then relax, knowing the job is done. The I's dotted and T's crossed. And hopefully the tea is hot and the chicken tender.

And I'm all for diversification. It's a wonderful way to limit the risks in your portfolio, by making sure you're not putting too many eggs in the one basket.

The problem is with distinction between those analogies. You see, having a few different baskets is different than having one basket for each egg.

The aim of diversification is to reduce the risks of concentration, not to deliver mediocrity by needing to be everything to everyone. By all means if you're not keen to pick stocks, go for the ultimate in diversification and buy an index fund. But if you're going to buy individual companies, Noah isn't the role model.

Which brings me to banks and miners. I don't have a single share of either in my portfolio.

While I'd never say never, I don't imagine doing so in the foreseeable future, either. Which is about as close to heretical as you'd get (and again invokes the example of Noah, if you recall the disdain with which he was treated by others who thought they knew better).

And here's why: after three decades of house price growth, I just don't think there's enough upside left with which to power bank profit growth at a market-beating pace in the medium term.

And miners? Their products power the global economy but their returns tend not to lend too much power to our portfolios.

They're price takers in a world with abundant supply, where the lowest-cost producers set the price. Good luck earning consistent (and growing) profits in that sort of industry.

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Scott Phillips is general manager of The Motley Fool. You can reach him at @TMFScottP on Twitter and via email.

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