Are you the type of investor who is actively seeking wealth-building opportunities for your SMSF (self-managed superannuation fund), or is your approach conservative, preferring to settle for smaller returns in exchange for a higher level of security? While we can all understand the reasoning behind the latter approach, is there a better alternative?
According to the ATO (Australian Taxation Office), current SMSF fund trustees have placed their investments predominately in property, cash and Australian shares. While there is nothing wrong with that, they may be missing opportunities to build more diverse and robust portfolios. They may also be exposing their funds to diminished returns should the Australian market drop sharply against the rest of the world.
It all depends on the asset class that features most strongly in their fund portfolios. Not all asset classes perform at the same level in the same time frame. For example, since 2008, interest rates have fallen to unprecedented levels. A fund that holds the bulk of their assets in cash will not have built as much wealth for its members as one that invested heavily in property during the same time period.
Many SMSF trustees are comfortable with outsourcing the administration of their fund to companies such as SMSF Assure, but some of them still prefer to make the investment decisions themselves. When they first established their fund, they were required to develop an investment strategy with a licensed financial adviser but, too often, they stick with this strategy year after year. This may not deliver them the best long-term outcome for their members, especially if their knowledge is limited to domestic shares and property.
A better solution could be to diversify their portfolios across a range of investments to not only spread the risk, but also to even out the peaks and troughs that occur in any type of market. Managed funds are one option that could appeal to fund trustees who are ready to be a little more aggressive in their investment choices, but still want a reasonable level of safety.
Managed funds offer both diversification and professional expertise. Instead of the fund trustee being responsible for investment decisions, these decisions are made by professional investment managers. Provided the trustees understand there is still a risk that the products chosen by these investment managers may not perform as expected, managed investments offer the opportunity to hold diverse assets that most direct investors cannot access.
The purpose of setting up an SMSF is to provide an income in retirement, so every trustee must be aware that investment requirements will change over time. New members may join the fund as old ones depart or retire, and these changes will alter its priorities and goals. An annual review of asset allocations should be part of the role of every trustee, offering the opportunity to change the mix of investments to suit these new goals and priorities.
Transforming your current SMSF portfolio is not something that should be rushed into, but given serious thought in conjunction with professional advice. As with any investment decision, ensure that the benefits and risks of diversification match the goals and risk tolerance of you and your members. What is right for your SMSF may be inappropriate for others.