“Don’t put all your eggs in one basket” unknown

Having been in the public practice of income tax compliance for close to 20 years now, I’m not so sure about this statement. Diversification belies deep complexity. To understand diversification, we need to define what that means because it means different things in different contexts. Our definition here is purchasing more than one security inside an SMSF. I’ve had to define narrowly here to get through this blog post in a small word count.

Owning multiple shares or assets inside a SMSF is increasingly unnecessary for the “true” investor. One important reason for this is the invention of the low cost, very broad based, computer managed index fund. In Australia, VAS is the leader in this field. Although staff are required to prepare tax statements, the ownership structure of Vanguard funds is circular such that the management company is owned by the fund which aligns unitholders with managers on both stability and cost. Specifically, Vanguard’s management company is ultimately owned by the investors so it will never be acquired and it also allows the manager to return profits to investors through lower costs. In summary, scale up = management fees as a % of assets managed down. This structure creates a self-reinforcing cycle of downward pressure on management costs and it is a welcome financial innovation.

Even putting low cost broad based index funds to the side, diversification is still questionable in a modern and well regulated economy and stock market like the ASX in Australia. Simply buying a share in the CBA for example exposes the shareholder to many different business lines e.g. insurance, super, business lending, project finance, mortgages etc, and the CBA’s revenue streams are also geographically diverse. There’s big non-monetary value in only having to watch one stock. You don’t have to keep track of 20 different holdings and you can accumulate deep understanding of your investee over time. Diversification wears investors down and eventually wears them out. Picking one horse also means that you don’t have to listen to as much twaddle from as many “analysts” shouting over each other to be heard as to what you should or shouldn’t do with your holdings. Picking a big profitable company with a sustainable moat like the CBA or Woolworths or any of the top 10-20 means that its highly unlikely to go bankrupt. The big 4 Aussie banks are oligopolistic monopolies or to put it simply, a cartel (politically protected profit machines). If any of the 4 go broke, the whole country will have much bigger problems than what’s happening to our super balances. In this context what’s wrong with putting all your eggs in one basket?

Advocating for a single holding portfolio is not the point of this blog post. However, it is worth considering for those who understand the value of simplicity in investment.

To discuss your circumstances, call or email Chris today at chris@solveaccounting.com.au