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Is Your SMSF Investment Strategy Sufficiently Diversified?

When was the last time you reviewed your SMSF investment strategy? If it’s been a while, make sure you have a look – the Australian Taxation Office (ATO) went on the front foot a few years ago, sending letters to over 17,000 SMSFs that hold greater than 90% of their total investments in a single asset class – going against the guidelines for diversification. So, how do you ensure that your SMSF Investment Strategy is diverse enough, and what might the ATO look out for?

SMSF Investment Strategy Requirements

SMSF’s are required to have a documented investment strategy and comply with 4 main considerations: Risk, Return, Diversification and Liquidity. The Superannuation Industry (Supervision) Act (SIS) requires trustees to formulate an investment strategy taking into account the whole circumstances of the fund including the following matters:

• The risk involved in making, holding and realising – and the likely return from – the fund’s investments, with regard to its objectives and expected cash flow requirements;
• The composition of the fund’s investments as a whole, including the extent to which the investments are diverse or expose the fund to risk from inadequate diversification;
• The liquidity of the fund’s investments with regard to its expected cash flow requirements;
• The ability of the fund to discharge its existing and prospective liabilities; and
• Whether the trustees of the fund should hold a contract of insurance that provides cover for one or more members of the fund.

While an SMSF is allowed to hold assets in only one class, it does present a risky investment strategy. Diversifying typically spreads the risk and goes some way to mitigating market volatility. If your SMSF isn’t diversified, its investment strategy document must outline that you have considered the inherent risks associated with a lack of diversification, considered how the fund’s current portfolio meets its investment objectives, and how it meets the return objectives and cash flow requirements of the trustees.

Common SMSF Investment Strategy Scenarios

Commonly, people who have purchased a property (e.g. commercial premises) using their super fund, find themselves in a situation where the property makes up the vast majority of their total assets. There is nothing wrong with this per se, but it is important that the fund then seeks to diversify investments over time with future contributions and considers insurance to provide liquidity (e.g. a member dies, and a death benefit needs to be paid).

Another common scenario is where a SMSF was set up in years past with funds initially held in cash and has remained as such for various reasons. This would be hard to justify in terms of having a diverse investment strategy, and aside from the compliance requirements, interest rates are volatile. Therefore, trustees could potentially miss out on growth and a much healthier account balance over time. Diversification can be achieved with a risk/return outcome to suit the individual trustees’ attitudes towards risk and stage of life. The important thing is to have considered these options and document a strategy that will meet your regulatory obligations, as well as help you achieve your financial goals and objectives.

What Now?

As a trustee of a SMSF, it is in your best interests to ensure its investment strategy is appropriate for you and any other members. Seeking professional advice is advisable to ensure you are maximising your potential retirement funds! For further information, or to organise an obligation-free consultation with one of our SMSF specialists, please contact us via our website or call us on 08 9325 2411 (Perth), 08 9301 2200 (Joondalup), or get in touch via our website.

Please note the information provided within this article is general of nature and is not a personal advice recommendation. Prior to considering strategies discussed in this article we recommend you seek personal financial advice. Please be aware that, without the benefit of financial advice, you may be committing yourself to financial strategies or products that are not appropriate for your overall personal situation, needs and objectives.

written by:

Jojo Rollerson

With her career in accounting spanning nearly two decades, Jojo brings to the MP+ Self-Managed Superannuation team extensive industry experience and a passion for industry-leading SMSF Services. Jojo and her team of accounting professionals manage clients’ self-managed superannuation fund affairs so they have the time to enjoy the things they would rather be doing! She enjoys giving clients peace of mind that their super is in the right hands, and has an excellent track record in turning complex superannuation situations into fantastic outcomes for her clients.

Outside of the office, Jojo loves travel, food, cooking, reading, movies, and a nice walk.