Setting up your Self-Managed Superannuation Fund for success

As many investors know, a major key to success is diversification. Having all your eggs in one basket, whether it’s one stock, one property or one private business, exposes you to significant risk at the mercy of market volatility that may be out of your control.

The situation is no different for Self-Managed Super Fund trustees. A successful SMSF investment strategy should insulate you against volatility and short-term downturns, while also preserving capital and growing your long-term returns. The key to building long term wealth for a comfortable retired life is to invest your SMSF across diverse asset classes and markets while evaluating risk against return.  Frequent reviews to recalibrate against your objectives, are also crucial.

About diversification

It may seem a simple concept to ensure your SMSF is suitably diversified. Australia’s SMSF Association found over 80% of trustees believe diversification is important.

So, if most trustees value diversification, what’s the concern?

While more than four in five trustees believe diversification is important, obviously many do not practice what they preach. A significant proportion of SMSF’s are over leveraged in a single asset class. Though many trustees invest primarily in shares to achieve some diversification, this may not be enough on its own. The SMSF Association estimates only 25 per cent of SMSF trustees say they invest in at least four asset classes. The ATO is increasingly concerned by this trend and issued a letter in late 2019 to nearly 18,000 trustees who held at least 90% of their fund in a single asset as part of an ATO campaign to encourage compliance with investment obligations.

Perks Private Wealth Director, Simon Wotherspoon points out that one key barrier to diversification is that some trustees believe they lack the funds to achieve it.

“A prudent SMSF strategy should consider your available funds when it is setup, then adapt as your circumstances change.”

“Importantly, diversification can be more cost effective than many realise. Indeed, today’s digital environment offers many opportunities to diversify your portfolio across international markets and delve into different asset classes.”

Build a sound framework for success

The importance of strategy to ensure your SMSF achieves its objectives cannot be understated. As explained in our guide to setting up an SMSF, the key to success is to clearly establish your objectives and develop a strategy that helps get you there. SMSFs have many attractions but they are not a ‘set-and-forget’ solution.  You must regularly review your strategy so it remains aligned to your objectives as these change with your personal circumstances.

This is where it can be useful to speak with a specialist SMSF adviser who can work with you on developing a strategy to suit your personal objectives. This can also cover compliance requirements and your trustee obligations.

“As an SMSF trustee you’re legally obliged to have a properly articulated and demonstrated investment strategy that is aligned to specific objectives,” says Simon.

“This strategy needs to consider many things.  They include investment risks, liquidity of your various investments, the fund’s ability to pay current and future benefits and whether members need to be insured.”

“Your strategy also needs to cover diversification to meet your trustee obligations.”

As a starting point, a well-diversified investment strategy should consider the following:

• Ensure there are clear and demonstrable retirement purposes in the investment decisions you make.
• Establish an investment objective and a strategy to achieve it.
• Review your portfolio and assess it against your objectives as often as you feel is necessary.
• Make sure you invest in more than one asset class.
• Ensure your Australian share portfolio is sufficiently diversified to manage risk.
• Also consider the benefits of geographic diversification.
• Ensure your cash allocation is appropriate.

Among other things, you should consider what is your ultimate retirement wealth target in net assets and income.  Otherwise, perhaps work towards medium term SMSF wealth goals that are well-aligned to your objectives. Either way, establishing a well-defined strategy with measurable targets and a clear investment strategy is critical to reliably position yourself for a comfortable retirement.

Regular reviews pay off

Unfortunately, SMSF investment strategies can’t be ‘set-and-forget’. They should be regularly reviewed against your objectives and changing circumstances, so you continue to meet your legal obligations as a trustee and ultimately build future wealth through your fund.

It’s generally best to review your investment strategy yearly but where any fund member’s circumstances materially change, it is important to promptly review your strategy.

Perhaps you’ve become concerned about your portfolio diversification, for example because a large illiquid asset like property comprises most of your portfolio.  Then it is wise to review your strategy against the risk of holding a large part of the fund’s value in one asset or asset class.

To help you manage your investment strategy, we encourage clearly stating your objectives in writing, giving you comfort they can be reasonably achieved. You should also document your actions and decisions regarding your objectives.

Help is at hand

Ultimately, how you choose to build your retirement wealth is one of your life’s most important financial decisions. If you’re considering a SMSF to meet your retirement goals or feel your current SMSF strategy isn’t up to scratch, it is wise to seek advice. An experienced SMSF Adviser will help you manage your obligations and work together with you on a strategy that achieves your objectives.