Your portfolio's greatest threat

George, an investor from Tumbulgum* writes:

“Hi Guys,

Turns out this investing business isn't as difficult as I thought. After loading up on News Corp, CSL and Macquarie Bank as you suggested in 2011, plus a few picks of my own, I've smashed the index. Maybe I'm the one that should be running an investment newsletter?

After all, wasn't it back in 2004 that Intelligent Investor first noted its concern about the rising housing market? Look how that worked out. The crash never came and prices are rocketing, especially in Sydney.

The pollies know the score. Only 13 out of 226 don't own property. Of those that do, the average holding is 2.5 properties. These guys set the rules on negative gearing and capital gains tax and are loading up because they know the tax system favours property speculation. Think you might have got this one wrong, too. There is no housing bubble.

Then you told me to diversify overseas by buying some cheap European and US stocks to offset the risk of a local recession. They worked out nicely but don't you think you're overdoing the recession risk thing here?

Last week you described Rio's result as 'stunning', with underlying earnings up 21% on record iron ore production. If China is a bubble, who do you think is buying this stuff, Lichtenstein? With a population only 50% urbanised, China's going to need a lot more coal and iron ore to finish the job.

Even the unemployment figures weren't as bad as they seemed. The trend figure, which smooths out seasonal variations, was up just 0.1% and new jobs created fell by only 300, the lowest this year. From what I can tell restaurants and shopping centres are full to bursting. A recession seems a long way off.

That's why I'm not as bearish as you on the banks. Frankly, I've disregarded your advice to limit my big bank holdings to no more than 20% of my portfolio. I bought Commonwealth Bank in the first tranche of privatisation in 1991. The price then was $5.40. Now it's over $80.

Selling down would trigger a huge capital gains tax bill. With the stock yielding 4.8% and the Government capitulating to the big banks on FoFA, I just don't see how they're as risky as you say.

So why not devote a hefty slice of your portfolio – mine's twice your recommendation - to the world's most profitable bank oligopoly, one so powerful it can get a Government to stiff even its own rusted-on voters?

Truth is, I think you're overstating the risks we face. Just because it's been 23 years since the last recession doesn't mean we're due. And even if we did hit the skids, how bad could it be? The GFC was the worst crisis in 70 years and we hardly noticed.

China's going okay and, along with the Indians, has its eyes on our resources. The world's deleveraging, housing is cracking along and the country's superannuation assets are now worth $1.8 trillion, more than annual GDP, most of which ends up in the kind of blue chip stocks in my portfolio.

If I were you, I'd tell your members that your record in stockpicking is second to none but you've got it wrong on the macro stuff.

Tell them to forget about increasing their cash holding as valuations rise because this isn't the end of a bull market, it's the start; Tell them to ignore overseas diversification and concentrate on local stocks where our economy is strong; Acknowledge that the mining cliff was a hillock that we're now over; Accept that the Australian property market is unique and that international comparisons are misleading; and most importantly, double that 20% holding limit on the banks because it's costing your members in tax, yield and share price growth.

As Peter Lynch said, 'If you spend 13 minutes analysing economic and market forecasts, you've wasted 10 minutes.' You guys have had your 10 minutes. Australia is travelling along just fine. There really is no need to worry.”

Complacency folks, it'll get you in the end.

* Tumbulgum does exist but George doesn't. He was invented to make a point.