The power of diversification for your SMSF
The overriding investment objective should be for your SMSF to deliver a sustainable income stream in retirement.
Every self-managed super fund (SMSF) must have a clearly articulated investment strategy. If your investment strategy is too broad, outdated and/or you’re not tracking its performance against your investment objective then you’re probably not taking full advantage of investment solutions that can fund the lifestyle you want in retirement. Therefore it’s worth understanding what an investment strategy for your SMSF should consider.
Trustees of SMSFs are required to consider a number of issues when formulating an investment strategy for their fund. These include the investment returns the trustees want to generate compared to the level of investment risk they are willing to take on.
Other issues that are also important to consider include the level of diversification of the fund’s assets, the liquidity of those assets and the ability of the fund to pay benefits and cover operating expenses as they fall due.
While there are no pre-determined levels of risk and return or diversification SMSF investment strategies are required to have, trustees are expected to be able to demonstrate that they have considered these elements.
It’s also important to realise that investment strategies are not set and forget and must be reviewed on at least an annual basis or whenever the fund’s circumstances change. For example, a trustee should review their fund’s investment strategy whenever a member retires and commences an account based pension as the fund may now have different risk/return, liquidity and cash flow requirements.
One of the best ways to manage risk and increase portfolio returns is to ensure your SMSF appropriately diversifies its assets.
Different types of investments perform better under different market conditions. By choosing investments from within a small range of asset classes you may be exposing your SMSF to the risk that its assets could all underperform at the same time. By increasing the number and type of potential assets classes –also known as diversifying your portfolio- you can reduce this risk.
Diversification is about spreading your investments over a range of assets, managers and markets. Diversification will not ensure against loss, but will help even out returns over your portfolio as a whole by reducing overall volatility.
Managed funds can help diversify your SMSF
Different types of asset classes, such as overseas shares, bonds or even infrastructure, may not always be easily accessible and can be daunting to invest in if you are not familiar with these markets.
One way you can overcome this and help to diversify your SMSF is to invest in managed funds. There is a wide range of managed fund options to consider, letting you easily diversify the types of investments your fund holds and reduce concentration risk.
Professional fund managers have access to research and resources to help them select and manage the investments. Because fund managers are responsible for the portfolio, they are constantly assessing market conditions and new opportunities, and in some cases, they can give you access to investment opportunities only available to professional investors.
To find out more about the power of diversification for your SMSF, please contact us.