SMSF trustees are required by law to review their investment strategy regularly, but research has found1 that deciding on the next investment can be one of their biggest concerns.
Revisiting, and possibly revising, the purpose and circumstances of the fund and its members at least every 12 months can be a way of understanding if the initial goals and potential outcomes remain relevant and achievable.
An SMSF investment strategy must take into account the following:
- The risks involved in making, holding and realising the SMSF’s investments, their expected return and cash flow requirements
- The diversification and composition of your SMSF investments
- The liquidity of your SMSF investments, having regard to expected cash flow requirements
- The SMSF’s ability to pay current and future benefits to the members
- Whether to hold insurance cover for each member of your SMSF
What you need to consider
Your investment choices must be for the sole purpose of providing retirement benefits for your fund’s members or you could miss out on tax concessions and trustees could face civil or criminal penalties.
However, trustees should try to remain open to the idea of being able to adjust and adapt so your SMSF strategies take into account changing economic environments globally and investing opportunities that might arise.
Global political and economic events can’t be foreseen, nor can outcomes be predicted with any certainty.
Broader economic risk should play a part in your decision making to ensure that asset allocation is appropriate for the life stage of the fund.
The best defence against this uncertainty is to have a clearly defined, diversified, long-term investment strategy. Apart from any legal requirement, having an effective investment strategy should help to guide you and your fund through uncertain times.
It is important to remember that superannuation is for the long-term. A good investment strategy that keeps members disciplined and focused on the long-term is essential.
Managing the risks
Diversification of your SMSF’s assets is another important aspect to consider. Diversifying your retirement savings across different assets and regions can be a way of helping to protect your fund from volatility in financial markets over the long-term.
The CommSec SMSF Trading Trends Report looks at some of the key share trading trends for SMSFs2.
In making decisions about your fund’s investment strategy and asset allocation, keep in mind:
- Avoid taking undue risks with your underlying investments that could potentially increase the likelihood of short-term losses
- If the fund is required to pay an income stream, ensure the cash flow from the assets is sufficient to cover those payments
- If there is a relatively long timeframe before benefits become payable from the fund, the potential capital growth of the investment is an important consideration
- Consider the effects of inflation and protect against the reduction in the real value of the fund’s investments
- All trustees and members of SMSFs have a range of attitudes towards risk and expectations regarding their funds’ investment performance. Consider sub-strategies for members with different risk profiles
Your investment strategy is required to be reviewed regularly and evidence of reviews will be sought by your approved auditor. It is also important to review your strategy whenever member circumstances change or as often as you feel is necessary.
The following practical tips will help you keep on top of your obligations:
- Put your investment objective and strategy in writing
- Set an investment objective that is likely to be achievable with the underlying investments you are comfortable to invest in
- There is no template for an investment objective and strategy, but make sure they reflect how you intend to invest your SMSF’s money
- The investments you actually make must be permitted by the investment strategy you have set
- Document your actions and decisions, as well as your reasons, and keep them as a record in order to demonstrate that you have satisfied your obligations as a trustee in this important area
Setting an effective investment strategy might seem daunting, but it’s important to be disciplined.
Even though it’s a self-managed super fund, don’t feel you have to know everything or do everything without any guidance. An SMSF accredited adviser can help you formulate, execute and review your investment strategy throughout the lifecycle of your SMSF, as well as answering any questions or concerns you may have.
1. CommBank, in partnership with the SMSF Association, has developed the SMSF Report based on in-depth research conducted to better understand the dynamics of the SMSF market and its investors. https://www.commbank.com.au/personal/superannuation/smsf/smsfreport.html
2. You can review the latest CommSec SMSF Trading Trends Report at this link https://www.commsec.com.au/content/dam/EN/PDFs/Product/SMSF/Commsec%20SMSF%20Trading%20Trends%20Report.pdf