SMSF investment strategy

Investment strategy

All self managed super funds are required by the Superannuation Industry (Supervision) Act 1993 (SIS Act) to have a documented investment strategy. The investment strategy starts with the investment objectives and then sets out the parameters for the investments, usually including an asset allocation. Other factors that the investment strategy should take into account include:

  • The risk vs return profile of the asset classes
  • Diversification
  • Liquidity needs (how easily and quickly the assets can be converted to cash)
  • Ability to discharge liabilities as they fall due
  • Insurance needs of the members

The investment strategy should be based on the goals, needs and preferences of all the SMSF members. Factors to consider include their age, their retirement needs and their attitude towards risk.

A review of the investment strategy should be conducted on a regular basis to ensure it continues to reflect the members’ circumstances. All decisions should be documented, including the decision to make no changes.


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Investment options

When it comes to investment options for SMSFs, you get a lot of choice. Your fund can invest in:

  • cash
  • term deposits
  • direct shares
  • managed funds
  • property and more.

As well as a wide range of investment choice, you get to choose the mix of investments for your fund through an investment strategy.

Things to consider when you’re planning your investment strategy

Diversity

Diversification is about investing in a variety of assets so that no single asset drives the performance and risk of an investment portfolio. It can mean positively performing investments balance out the negatively performing ones.

This can help lower the risk across a portfolio and smooth out investment returns over time. While this may not lead to huge gains, the effect of big losses may not be felt as strongly.

Liquidity

Although you’re generally unable to access your super until retirement it’s still important to consider how accessible cash is in an investment (eg an at-call deposit account is very liquid, while property is not).

An SMSF will have short term cash requirements such as paying administration charges and tax liabilities. SMSFs can have a combination of liquid and illiquid assets so you may need to think about cash flow and when you’ll need access to your money.

Once one or more members enter the pension phase, the cash flow will need to be managed such that pension payments can be met. If a member passes away, the trustees may need to access cash within the SMSF to pay out the estate of the deceased.

Asset allocation profiles

Asset allocation is how your investment portfolio is spread across different investments. It is usually structured in the form of the minimum and maximum percentage of the funds allowed to be invested in different asset classes.

Asset allocation can often involve considering the split between growth investments (generally more aggressive) and income investments (generally more conservative). Typically, growth investments are expected to generate higher returns over the long term, however those higher returns come with higher risk. Risk can be measured as the likelihood of an investment not generating the expected return, or even a negative return. Another common measure of risk is the volatility of the investment returns. Shares and property are the most common growth investments.

Income investments are expected to generate regular income. The total returns are usually lower than growth investments, but so too are the risks. The most common income investments are fixed income securities and cash.