So your SMSF Administrator/Accountant is now having to use an Independent Auditor and suddenly you are being asked for more than just the 1 page SMSF Investment Strategy template provided by the Accountant that you used to sign without filling in the blanks and without considering its purpose.

The reason an Investment strategy is required by an SMSF and also required to be reviewed regularly is that personal circumstances changes as do markets and economies. You need to consider your investment portfolio in the light of these changes and this is a way of prompting you to do so as part of the annual review.

Each year we experience a lot of market and political volatility with differing views on where the economy is headed, leading to a subsequent impact on share and property markets.

As an investor is can be easy to get caught up in the short-term noise and lose focus. The SMSF Investment strategy requirement is a way of prompting you, the Trustee(s), to really consider what objectives you are trying to achieve and the strategies and asset allocation that you need to follow to achieve them.

Having a well thought out SMSF investment strategy is a key element in helping you achieve a smooth transition in to and through retirement.

Here are 6 important considerations in establishing your SMSF investment strategy.

1. Liquidity Needs: What life stage are each of the members in?
   The members’ personal circumstances and life-stage will have the most important impact on your SMSF investment strategy.  If you are all 20 years out from retirement, you may choose to invest for growth and ride with volatility of the share and property markets to benefit from the risk/return premium attributed to those sectors which are less liquid than cash and bonds. If however one or more of the members is approaching retirement or using a Transition to Retirement Pension strategy  you may choose a more cautious approach to ensure sufficient income is available for pensions regardless of market ups and downs. That requires more active management to maintain some liquidity still seek a decent return through a diversified portfolio. For example we always recommend 12-36 months pensions are retained in cash or fixed interest to avoid selling assets in a downturn and reducing your capital value.
2. What’s the members’ risk tolerance
   The ability of all involved to sleep comfortably at night without worrying about their investments should always be taken into consideration regardless of your age. If you or another member have no experience or confidence in certain market sectors, then short-term your investment strategy should be tailored accordingly. But you should then seek more information, education and guidance to build your knowledge and then your confidence in those missing sectors so that you can adopt a well diversified strategy long-term. It is generally accepted that the greater the risk of an asset, the greater the potential returns but this risk abates as time passes so riskier assets can pay off handsomely over time with less risk than perceived short-term. A portfolio designed to reduce your concerns while not providing optimal returns provides THE SLEEP FACTOR!
3. Asset allocation
   Investing in the right asset classes is a major factor in the returns you will receive. Aussie Equities and Cash are not a full solution long-term. Cash and TD rates are currently low and our share market had a poor year last year and our economy is struggling while international equities, property and infrastructure are benefiting from improving economies, low interest rates and the dropping Aussie dollar. Your asset allocation should be reviewed annually and rebalanced to account for the returns from various asset classes and their future forecast. We are not saying make dramatic changes but do take tilts to certain sectors that will benefit from the current economic climate.
4. Avoid sector bias
   The Big 4 Banks, Woolworths and Telstra do not make a diversified portfolio! Once you have decided which asset classes to invest in, it is important to diversify within those asset classes. Frequently I see investment portfolios with a narrow range of large Australian companies just like mentioned above providing very poor diversification – and leaving the overall investment portfolio heavily reliant on the fortunes of one or two sectors. Self Managed Superannuation Funds (SMSF) set up for the benefit of control without the willingness to take advice or learn about portfolio design, frequently lack diversification with an over reliance on one property, Australian shares and/or cash. With Control comes responsibility to learn and adapt.
5. Tax efficiency
   Often the spur to look at complex and structured investments near June 30^th is the tax consideration. The amount of tax you pay on investment has a major impact on your SMSF investment strategy.  Here is 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 greater than 12 months in accumulation phase
• 0% tax on earnings and capital gains on assets sold in pension phase

For example, if you were lucky enough to have bought 1000 CBA shares during the GFC at $30 and sell them now at $90 in accumulation phase you will pay $6,000 in tax with a net profit of $54,000. While if you were lucky to move in to pension phase you receive the full $60,000 tax-free. Tax is an important consideration and an understanding of the tax impacts which you purchase your asset in, and the tax payable when you dispose of the asset, are very important but should not be the sole driver of your Self Managed Superannuation Fund investment strategy.

6. Insurance Needs of the Members

Trustees of SMSFs now have to consider, as part of its Investment strategy “whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.”

This is a significant addition to the previous provisions, and has been prompted by the Super System Review panel noting that less than 13% of SMSFs have insurance. This is a subject on its own so please refer to my earlier article for guidance Self Managed Super Funds must include an Insurance Needs Analysis as part of the fund’s SMSF Investment Strategy.

It is important to update your investment strategy on an annual basis or more often if making large contribution or large investments to make sure you are maximising the probability of achieving your financial goals whilst reducing the risk of capital losses.

You can seek professional advice to help with your investment strategy, but remember: as trustee, you are still ultimately responsible for your fund’s investment decisions so next time you sign off a template provided by your administrator remember it is you that are responsible not them.

Please contact us on 02 9894 1844 or Liam@verante.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.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

I’ll leave the last word or should I say video to the ATO

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

Tel: 02　96993693, Mobile: 0413 936 299

PO Box 6002, NORWEST  NSW 2153. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Advisory Pty Ltd ABN 41 621 447 345, AFSL 476223

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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