The Importance of Building a Portfolio with Multiple Banks: When and Why?

In today's financial landscape, diversification is key. So, why is it important to have a portfolio with multiple banks? And when should you start using multiple banks? Let's explore these questions and the benefits of spreading your financial assets across different institutions.

I firmly believe that it is crucial, particularly in the long run, to diversify your lending portfolio across a minimum of two different banks. The rationale behind this approach is twofold. 

Firstly, it eliminates the possibility of cross-collateralization, which we discussed previously. By having two separate loans with different banks, you can rest assured that there is no chance of them being linked in that way. 

Secondly, by spreading your portfolio across multiple institutions, you effectively mitigate the risks associated with concentrating all your assets in one place. Allow me to share a recent incident that highlighted this point. Although it didn't involve any of our clients, one of our client's close friends encountered an unexpected situation where they received a notice requiring the repayment of their loan within a mere 30 days. Prior to this incident, I personally didn't think such occurrences were common. However, firsthand witnessing this incident made me acutely aware of the inherent risks. When all your banking activities, including transaction accounts, credit cards, and home loans, are consolidated with a single bank, accessing them through a single Internet banking portal and viewing your entire portfolio at once may seem convenient. However, it's crucial to recognise that the bank gains comprehensive insight into your financial activities, including how you spend your money and the quality of your financial conduct.

Furthermore, under the terms of the finance contract you enter into, the bank has the authority to recall your funds at their discretion if they deem something to be amiss or if they feel uncomfortable with the arrangement. Many individuals are unaware of this provision. Witnessing that note truly shocked me, as it underscored the inherent risks associated with having all your financial dealings with a single bank, even if cross-collateralization is not a concern.

Essentially, what I am saying is that it's almost like taking a risk Not to diversify your portfolio across lenders. I can't even emphasise enough the importance of mitigating that risk this way. Likewise, risk is always involved when it comes to property investments, any business activity, or investing in general. It's similar to having insurance for your investment properties, having landlords and building insurance. It's like having an extra layer of protection that you hope you never have to use, but when unexpected events occur, you'll deeply regret not taking all the necessary precautions. It's just another added safeguard that doesn't incur significant additional costs, if any at all.

Watch the video above, where I discuss this very topic with Daniel Walsh, who is a fantastic buyer's agent from Your Property Your Wealth.

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