So your SMSF Administrator/Accountant now has to use an Independent Auditor,and suddenly you are being asked for more than just the 1 page SMSF Investment Strategy template provided by the Accountant that you used to sign without filling in the blanks and without considering its purpose.
Here are six important considerations in establishing your SMSF investment strategy.
Liquidity Needs: What life stage are each of the members in?
The members’ circumstances and life-stage will have the most important impact on your SMSF investment strategy. If you are all 20 years out from retirement, you may choose to invest for growth and ride with the volatility of the share and property markets to benefit from the risk/return premium attributed to those sectors which are less liquid than cash and bonds.
What’s the members’ risk tolerance?
The ability of all involved to sleep comfortably at night without worrying about their investments should always be taken into consideration regardless of your age. If you or another member have no experience or confidence in certain market sectors, then short-term your investment strategy should be tailored accordingly. But you should then seek more information, education,and guidance to build your knowledge and then your confidence in those missing sectors so that you can adopt a well-diversified strategy long-term.
Investing in the right asset classes is a major factor in the returns you will receive. Aussie Equities and Cash are not a full solution long-term. Cash and TD rates are currently low,and our share market had a poor year last year,and our economy is struggling while international equities, property,and infrastructure are benefiting from improving economies, low interest rates,and the dropping Aussie dollar. Your asset allocation should be reviewed annually and rebalanced to account for the returns from various asset classes and their future forecast.
Avoid sector bias
The Big 4 Banks, Woolworths and Telstra do not make a diversified portfolio! Once you have decided which asset classes to invest in, it is important to diversify within those asset classes. Frequently I see investment portfolios with a narrow range of large Australian companies just like mentioned above providing very poor diversification – and leaving the overall investment portfolio heavily reliant on the fortunes of one or two sectors.
Often the spur to look at complex and structured investments near June 30th is the tax consideration. The amount of tax you pay on investment has a major impact on your SMSF investment strategy. Here are the tax basics for SMSFs:For example, if you were lucky enough to have bought 1000 CBA shares during the GFC at $30 and sell them now at $90 in accumulation phase you will pay $6,000 in tax with a net profit of $54,000. While if you were lucky to move in to pension phase, you receive the full $60,000 tax-free.
Insurance Needs of the Members
Trustees of SMSFs now have to consider, as part of its Investment strategy “whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.”This is a significant addition to the previous provisions and has been prompted by the Super System Review panel noting that less than 13% of SMSFs have insurance.
You can seek professional advice to help with your SMSF investment strategy but remember: as trustee, you are still ultimately responsible for your fund’s investment decisions so next time you sign off a template provided by your administrator remember it is you that is responsible not them.