Why diversification matters for SMSFs
Diversification is an investment principle that applies to Self-Managed Super Funds (SMSFs). It means spreading your investments across different asset classes and sectors to reduce your portfolio’s exposure to risk. By not putting all your eggs in one basket, you can help your SMSF weather market volatility and work towards more consistent, long-term returns.
For SMSF trustees, diversification should be considered as part of the fund’s investment strategy, particularly in relation to managing risk. Trustees must ensure the strategy reflects the fund’s objectives and complies with superannuation laws.
Here are a few ways you can diversify your portfolio.
Common asset classes for SMSF Investments
One way to diversify your portfolio is to spread your money across different asset classes then the different options for each class. Common asset classes include:
- Shares (Australian and international)
- Property (direct or listed)
- Fixed interest (bonds, term deposits)
- Cash (high-interest savings, cash management accounts)
- Alternative assets (such as infrastructure, commodities, or managed funds)
Each asset class behaves differently in response to economic cycles. For example, shares may offer higher growth but greater volatility, while cash and fixed interest provide stability and income.
As an SMSF trustee, this could mean investing across shares, property, fixed interest and cash. Where you invest will depend on your fund’s investment strategy and risk profile.
For example, you could invest in companies from different industries such as healthcare and tech, or property in Australia or overseas.
Tip: Your SMSFs mix should reflect your fund’s risk profile, investment horizon, and the retirement objectives of all members.
How to diversify with shares
The Australian Securities Exchange (ASX) lists thousands of companies across a wide range of industries. SMSF trustees may diversify their share portfolio by considering:
- Small, medium & large companies
- Different industries like financial services & telecoms
- Cyclical or defensive shares
Why it matters: If your SMSF holds shares with similar characteristics, you may be overexposed to specific risks. A diverse mix can help smooth out returns and reduce the impact of downturns in any one sector.
Compliance note: All share investments must align with your SMSFs documented investment strategy and be made with the sole purpose of providing retirement benefits.
Definition: Cyclical shares
Cyclical shares include companies that make and sell non-essential goods and services, such as cars, retail and hospitality. These shares tend to be more sensitive to economic cycles.
How to diversify with ETFs
Exchange-traded funds (ETFs) are a popular way for SMSF trustees to access instant diversification. With a single trade, you could gain exposure to:
- Broad market indices (e.g. ASX 200, S&P 500)
- Specific sectors (e.g. technology, healthcare, resources)
- International markets
- Themed investments (e.g. ESG, commodities, currencies)
ETFs pool money from many investors to buy a basket of assets, which means your SMSF can access hundreds or thousands of companies, bonds, or other assets at once. This can be more cost-effective and efficient than buying individual shares.
Tip: Always check the underlying assets, fees, and risks of any ETF before investing. Make sure the ETF fits your SMSFs investment strategy and risk profile.
