Is it Better to Invest in the Big 4 Banks or Keep Your Money in Cash?

It’s a well-known fact that you can’t buy yesterday's returns, yet this is what a lot of investors do when making a decision about where to invest. But what many fail to consider is that the investments that achieve the best return in the previous year usually don’t perform the following year. And when you take into account the effect of inflation on the overall return in recent years, it means investors have been losing out.

Should you invest in the big 4 banks?

The situation has been made worse given that CPI has also been high. This has made it hard for investors to make the right decision because investments need to achieve higher returns than CPI and fees otherwise their capital is eroding.

According to the RBA, CPI has fallen since January of 2023 for six of the last seven months to the end of July to be sitting at 4.9 per cent, which is still above their target range of 2 to 3 per cent. So where is the best place to invest? In my opinion, you can’t go past the big four banks and I don’t mean putting your cash in a bank account or a term deposit. If you trust the banks to hold your cash, then you should trust them enough to buy their shares.

All of the banks are paying a very good dividend yield that is similar to or better than CPI but the big advantage of owning the bank’s shares is the opportunity to achieve capital gains. Right now, ANZ is paying the highest yield at around 7 per cent, Westpac is around 6 per cent, NAB is around 5 per cent and finally, CBA is around 4 per cent. The banks also issue a fully franked or tax-paid dividend, which means the gross yield you receive is much higher.

Despite the big four banks' share prices not performing that well over the past year or so, I believe they are set to rise in a sustained uptrend, which makes now an opportune time to invest before they start to rise. While we can’t buy yesterday's returns, we can certainly set ourselves up to receive tomorrow's returns, which is a far safer way to invest.

What were the best and worst performing sectors last week?

The best performing sectors included Materials up 3.88 per cent followed by Financials up 2.52 per cent and Energy up 1.35 per cent. The worst performing sectors included Real Estate down 0.97 per cent followed by Healthcare down 0.87 per cent and Communication Services down 0.05 per cent.

The best performing stocks in the ASX top 100 included Fortescue Metals up 9.38 per cent followed by Washinton H. Soul Patterson up 7.18 per cent and Rio Tinto up 6.96 per cent. The worst performing stocks included Bluescope Steel down 8.02 per cent followed by IGO down 6.99 per cent and Cleanaway Waste Management down 6.84 per cent.

What's next for the Australian stock market?

Once again, we have had another interesting week with the All Ordinaries Index doing an almost complete reversal of the prior week to close up 1.46 per cent. What’s occurred over these last three weeks is certainly quite strange, as we experienced a very strong bullish week followed by a very bearish week only for the Australian market to be bullish again with the price ending just 7 points lower last week than where it closed two weeks earlier.

It is possible that we may continue to see this type of volatility in the market until at least early this week. Given the strong close last Friday, I would normally suggest the market will rise this week and if it does, we may see a sustained move up over the coming month. That said, given the current volatility, I am not confident this will occur. Without wanting to sound pessimistic, we still need to be prepared for a fall in October down to around the 7,000-point support level I have mentioned several times in the past.

Looking at the top 20 stocks, which will lead any charge up out of this current volatility, things look good, so we may need to be patient just a little longer. Last week both the Materials and Financial sectors moved up together which is also a great sign. If both these sectors continue to move up, then the market as a whole will also rise.

For now good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.