So, your SMSF Administrator or Accountant now needs to use an Independent Auditor, and suddenly, you're being asked for more than just the one-page SMSF Investment Strategy template you used to sign without much thought.
The reason an investment strategy is required for an SMSF, and why it needs regular reviews, is because personal circumstances, markets, and economies change. You need to consider your investment portfolio in light of these changes, and this requirement prompts you to do so as part of your annual review.
Every year, we see a lot of market and political volatility, with differing views on where the economy is headed, impacting share and property markets. As an investor, it's easy to get caught up in the short-term noise and lose focus. The SMSF Investment Strategy requirement helps you, the Trustee(s), to really think about your objectives and the strategies and asset allocation needed to achieve them.
Having a well-thought-out SMSF investment strategy is crucial for a smooth transition into and through retirement.
Here are six important considerations for establishing your SMSF investment strategy:
Liquidity Needs: What life stage are each of the members in?
The members' personal circumstances and life stage will significantly impact your SMSF investment strategy. If you're all 20 years from retirement, you might invest for growth and ride out market volatility. However, if some members are nearing retirement or using a Transition to Retirement Pension strategy, a more cautious approach is needed to ensure sufficient income for pensions, regardless of market ups and downs. This requires active management to maintain some liquidity while seeking decent returns through a diversified portfolio. For example, we recommend keeping 12-36 months of pensions in cash or fixed interest to avoid selling assets in a downturn and reducing your capital value.
Risk Tolerance:
Everyone's ability to sleep comfortably at night without worrying about their investments should be considered, regardless of age. If you or another member lack experience or confidence in certain market sectors, tailor your short-term investment strategy accordingly. Seek more information, education, and guidance to build your knowledge and confidence in those sectors, so you can adopt a well-diversified strategy long-term. Generally, the greater the risk of an asset, the greater the potential returns, but this risk decreases over time. A portfolio designed to reduce your concerns while not providing optimal returns offers THE SLEEP FACTOR!
Asset Allocation:
Investing in the right asset classes is crucial for the returns you'll receive. Aussie Equities and Cash alone aren't a long-term solution. With low cash and TD rates, and a struggling share market and economy, international equities, property, and infrastructure are benefiting from improving economies, low interest rates, and the dropping Aussie dollar. Review and rebalance your asset allocation annually to account for returns from various asset classes and their future forecasts. We're not suggesting dramatic changes, but consider tilting towards sectors that will benefit from the current economic climate.
Avoid Sector Bias:
The Big 4 Banks, Woolworths, and Telstra do not make a diversified portfolio! Once you've decided which asset classes to invest in, it's important to diversify within those classes. Often, investment portfolios have a narrow range of large Australian companies, providing poor diversification and leaving the portfolio heavily reliant on one or two sectors. SMSFs set up for control without the willingness to take advice or learn about portfolio design often lack diversification, relying too much on one property, Australian shares, and/or cash. With control comes the responsibility to learn and adapt.
Tax Efficiency:
Tax considerations often spur interest in complex and structured investments near June 30th. The amount of tax you pay on investments significantly impacts your SMSF investment strategy. Here are the tax basics for SMSFs:
15% tax on earnings and capital gains on assets held for less than 12 months in accumulation phase.
10% tax on capital gains on assets held for more than 12 months in accumulation phase.
0% tax on earnings and capital gains on assets sold in pension phase.
For example, if you bought 1000 CBA shares during the GFC at $30 and sell them now at $90 in accumulation phase, you'll pay $6,000 in tax with a net profit of $54,000. If you're in pension phase, you receive the full $60,000 tax-free. Understanding the tax impacts when you purchase and dispose of assets is crucial but shouldn't be the sole driver of your SMSF investment strategy.
Insurance Needs of the Members:
Trustees of SMSFs now need to consider whether the fund should hold insurance for one or more members. This significant addition was prompted by the Super System Review panel noting that less than 13% of SMSFs have insurance. For more guidance, refer to my earlier article on this topic. Including an Insurance Needs Analysis as part of the fund’s SMSF Investment Strategy is essential.
It's important to update your investment strategy annually or more often if making large contributions or investments, to maximize the probability of achieving your financial goals while reducing the risk of capital losses.
You can seek professional advice to help with your investment strategy, but remember: as a trustee, you're ultimately responsible for your fund’s investment decisions. So next time you sign off a template provided by your administrator, remember it's you who is responsible, not them.
Please contact us at 1300 459 101 or andre@wealtheffect.com.au if you would like to review your current SMSF investment strategy or need assistance in preparing an SMSF investment strategy that matches your members’ needs.
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