Self-Managed Super Funds (SMSFs) provide individuals greater control over their retirement savings, allowing them to choose and manage their own investments. A key component of managing an SMSF is developing a robust investment strategy. This strategy is crucial to achieving long-term financial goals, ensuring compliance with regulatory requirements, and safeguarding the fund’s sustainability. Let’s dive into the essential elements of SMSF investment strategies, including the types of investments, associated risks and benefits, and key considerations for managing your SMSF effectively.
An SMSF can have up to six members. Each member must also be a trustee of the fund, or if the SMSF has a corporate trustee, each member must be a director of the corporate trustee. This ensures that all members are involved in the decision-making process and share responsibility for the fund’s management.
What are SMSF investment strategies?
SMSF investment strategies are plans developed by trustees to guide investment decisions within the fund. These strategies ensure that the SMSF meets the retirement objectives of its members while complying with legal obligations. A well-crafted SMSF strategy considers factors such as risk tolerance, diversification, liquidity, and the investment time horizon, aiming to balance growth potential with the need for stability and security.
ATO requirements & considerations
The Australian Taxation Office (ATO) mandates that every SMSF must have a documented investment strategy. This strategy should address several key considerations, ensuring the fund’s investments are sound and sustainable. Key requirements include:
- Addressing the risks associated with investments.
- Ensuring appropriate composition and diversification of the fund’s assets.
- Maintaining sufficient liquidity to meet ongoing expenses.
- Making provisions for the fund’s ability to pay benefits when required.
- Considering the insurance needs of SMSF members.
What are common SMSF investment options?
SMSFs can invest in a variety of asset classes, including:
- Shares and Exchange-Traded Funds (ETFs)
- Property (residential and commercial)
- Fixed interest and bonds
- Cash and term deposits
- Managed funds
- Physical commodities
- Other Options – SMSFs can also invest in personal items of value, such as artwork, jewellery, or wine, provided they comply with specific regulations under the Superannuation Industry Supervision Act (SISA). Additionally, SMSFs can invest in international markets, giving trustees the flexibility to diversify their portfolios globally
Shares & ETFs
Shares represent ownership in a company, while Exchange-Traded Funds (ETFs) are investment funds traded on stock exchanges, holding a diversified portfolio of assets.
What are the benefits of investing in shares & ETFs as part of your SMSF investment strategy?
- Diversification helps mitigate risk: By investing in a mix of shares and ETFs, SMSFs can achieve broad diversification, reducing the impact of poor performance in any single investment.
- Potential for higher returns over time compared to other investment types: Historically, shares have provided higher long-term returns compared to other asset classes like bonds or cash.
- Access to a broad range of industries and global markets: ETFs offer exposure to various industries and international markets, allowing SMSFs to benefit from global economic growth.
What are the risks of investing in shares & ETFs as part of your SMSF investment strategy?
- Exposure to market swings can lead to short-term losses: Market volatility can result in significant short-term losses, which may be challenging for investors with a low risk tolerance.
- The need for continual monitoring of performance and risks: Investing in shares and ETFs requires ongoing monitoring to ensure the portfolio remains aligned with the SMSF’s investment strategy and risk tolerance.
- Shares can underperform during economic downturns: During periods of economic instability, shares may underperform, leading to potential losses for the SMSF.
Property investment (residential & commercial)
SMSFs can invest in residential or commercial properties, providing rental income and potential capital growth. This allows trustees to diversify their portfolios and potentially enhance their retirement savings.
What are the benefits of investing in property as part of your SMSF investment strategy?
- Potential for long-term capital appreciation: Property has historically shown strong potential for capital growth over the long term, making it a valuable asset for retirement savings.
- Regular rental income can provide steady cash flow: Investing in property can generate a consistent stream of rental income, which can be reinvested or used to cover SMSF expenses.
- Diversification beyond traditional asset classes: Including property in an SMSF portfolio helps diversify investments, reducing reliance on traditional assets like shares and bonds.
- Tax advantages: SMSFs benefit from concessional tax rates on rental income and capital gains. Rental income is generally taxed at 15% during the accumulation phase and can be tax-free in the pension phase. Capital gains tax can be reduced to 10% if the property is held for more than 12 months.
What are the risks of investing in property as part of your SMSF investment strategy?
- High setup and ongoing costs: Investing in property involves significant upfront costs, including legal fees, stamp duty, and property management fees. Ongoing costs such as maintenance, insurance, and property management can also be substantial.
- Property market volatility: Property values can fluctuate due to market conditions, impacting both rental income and the overall value of the investment.
- Limited liquidity compared to other investments: Property is a relatively illiquid asset, meaning it can be challenging to quickly sell the property if the SMSF needs to access funds.
- Compliance risks: SMSFs must adhere to strict regulations when investing in property, including the sole purpose test and restrictions on related party transactions. Non-compliance can result in severe penalties.
Fixed interest & bonds
Fixed interest investments, such as government and corporate bonds, provide regular interest payments over a fixed term. These investments are essentially loans made by the investor to the issuer (government or corporation), which agrees to pay back the principal amount at maturity along with periodic interest payments.
What are the benefits of investing in fixed interest & bonds as part of your SMSF investment strategy?
- Predictable income with fixed interest payments: Bonds provide a steady and predictable income stream through regular interest payments, which can help manage cash flow within the SMSF.
- Lower risk compared to shares and property: Bonds are generally considered lower risk than shares and property because they offer fixed returns and are less volatile.
- Diversifies the SMSF portfolio with stable returns: Including bonds in an SMSF portfolio helps diversify investments, reducing overall risk and providing stability, especially during market downturns.
- Capital preservation: Bonds are often used to preserve capital, as the principal amount is typically returned at maturity, assuming the issuer does not default.
What are the risks of investing in fixed interest & bonds as part of your SMSF investment strategy?
- Bond prices can fluctuate due to interest rate changes: When interest rates rise, bond prices typically fall, and vice versa. This inverse relationship can affect the market value of bonds if they are sold before maturity.
- Issuer default risk: There is a risk that the bond issuer may default on their payments, meaning they are unable to meet their interest or principal repayment obligations. This risk is higher for corporate bonds compared to government bonds.
- Inflation can erode the real value of returns: If inflation rates exceed the interest rate on the bond, the real value of the returns can be diminished, reducing the purchasing power of the income received.
- Liquidity risk: Some bonds may be difficult to sell quickly without incurring a loss, especially in a less liquid market.
Cash & term deposits
Cash investments and term deposits involve placing funds in secure bank accounts or fixed-term deposits, offering stability and liquidity. These investments are considered low-risk and provide a safe haven for preserving capital.
What are the benefits of investing in cash & term deposits as part of your SMSF investment strategy?
- Capital preservation with minimal risk: Cash and term deposits are among the safest investment options, ensuring the principal amount is preserved with minimal risk of loss.
- Easy access to funds for liquidity needs: Cash investments provide immediate access to funds, which is essential for meeting the SMSF’s short-term liabilities and expenses.
- Guaranteed returns on term deposits: Term deposits offer fixed interest rates, providing predictable and guaranteed returns over the investment period.
- Stability during market volatility: Cash and term deposits can act as a buffer during periods of market volatility, helping to stabilise the overall SMSF portfolio.
What are the risks of investing in cash & term deposits as part of your SMSF investment strategy?
- Lower returns compared to other asset classes: Cash and term deposits typically offer lower returns than other investments like shares or property, which may impact the long-term growth of the SMSF.
- Inflation risk can reduce the purchasing power of returns: If the inflation rate exceeds the interest earned on cash and term deposits, the real value of the returns can be eroded, reducing purchasing power.
- Potential penalties for early withdrawal from term deposits: Withdrawing funds from term deposits before the maturity date can incur penalties, reducing the overall return on investment.
Other Investment Types You Might Consider
Managed Funds
Managed funds pool investments from multiple investors, allowing SMSFs to access a diversified portfolio managed by professional investment managers.
Benefits:
- Professional management: Managed funds are overseen by experienced investment managers who make informed decisions on behalf of investors.
- Diversification: These funds offer exposure to a wide range of asset classes, reducing the risk associated with individual investments.
- Accessibility: Managed funds provide an easy way for SMSFs to invest in complex markets and asset classes without needing extensive knowledge or resources.
Risks:
- Management fees: Managed funds often come with management fees, which can reduce overall returns.
- Performance risk: The performance of managed funds depends on the skills of the investment managers, and there is no guarantee of positive returns.
Physical Commodities and Other
SMSFs can invest in physical commodities such as gold, silver, and other valuable materials, as well as personal items of value like artwork, jewellery, or wine, provided they comply with specific regulations under the Superannuation Industry (Supervision) Act (SISA). However, it is important to note that these assets cannot be used personally by the SMSF members or related parties.
Benefits:
- Inflation protection: Physical commodities can offer protection against inflation, as their value often rises when the cost of living increases.
- Diversification: Including physical commodities in an SMSF portfolio can provide diversification, reducing reliance on traditional financial assets.
- Tangible assets: Physical commodities are tangible assets that can be held and stored, providing a sense of security for some investors.
Risks:
- Volatility: The value of physical commodities can be highly volatile, influenced by market demand, geopolitical events, and other factors.
- Storage and insurance costs: Physical commodities require secure storage and insurance, which can add to the overall cost of the investment.
- Liquidity issues: Selling physical commodities can be more challenging and time-consuming compared to other investments.
- Usage restrictions: Collectables and personal use assets owned by the SMSF cannot be used by members or related parties. They cannot be stored in the private residence of any related party, and must be insured in the name of the SMSF within seven days of acquisition.
What are the key considerations when choosing an SMSF investment strategy?
- Risk Tolerance: Assess the risk appetite of all fund members. This involves understanding how much risk each member is willing to take and balancing high-growth assets with more conservative investments.
- Diversification: Spread investments across different asset classes to mitigate risk. Diversification helps protect the fund from significant losses by ensuring that not all investments are affected by the same market conditions.
- Liquidity: Ensure sufficient liquidity to meet expenses and benefit payments. This means having enough easily accessible funds to cover ongoing costs and any unexpected expenses.
- Investment Horizon: Align investments with the retirement timeline of members. Younger members may prefer growth-oriented investments, while those nearing retirement might opt for more stable, income-generating assets.
- Compliance: Adhere to ATO regulations and ensure the strategy is documented and reviewed regularly. Compliance with the Superannuation Industry (Supervision) Act (SISA) and other relevant regulations is crucial to avoid penalties.
- Sole Purpose Test: Ensure that all investments are made with the sole purpose of providing retirement benefits to members or their dependents.
- Regular Reviews: Regularly review and adjust the investment strategy to reflect changes in market conditions, member circumstances, and regulatory requirements.
What costs & expenses do I need to consider for SMSF investment?
- Setup Costs: Initial costs for establishing an SMSF, including the trust deed, ATO application forms, investment strategy, and general trust advice. If a corporate trustee structure is used, additional costs for setting up the company structure will apply.
- Professional Advisor Fees: Fees for obtaining financial advice on the suitability of an SMSF, as well as ongoing advice regarding the management of the fund, insurance, investments, or debt.
- Audits: Annual audits to ensure compliance with regulatory requirements. These audits verify that the SMSF is operating according to its investment strategy and legal obligations.
- Investment Management Fees: Costs associated with managing investments, including fees for financial advisers, fund managers, and brokerage.
- Insurance Cover: Premiums for insuring fund members, including life, total and permanent disability (TPD), and income protection insurance.
- Legal and Accounting Fees: Professional fees for legal and financial advice, including the preparation of financial statements, tax returns, and compliance documentation.
- Administrative Costs: Expenses related to the day-to-day management of the SMSF, such as bank fees, software subscriptions, and trustee education.
- Statutory Fees: Fees payable to regulatory bodies, such as the Australian Securities and Investments Commission (ASIC) annual fee.
What to do following a market correction
- Review the SMSF Strategy: Assess the impact of the market correction on the fund’s investments. Determine whether the current strategy still aligns with the fund’s goals and risk tolerance.
- Rebalance the Portfolio: Adjust asset allocations to align with the investment strategy. This may involve selling overperforming assets and buying underperforming ones to maintain the desired asset mix.
- Seek Professional Advice: Consult with financial advisers to navigate market volatility. Professional advice can help trustees make informed decisions and adjust strategies to mitigate risks.
- Maintain a Long-Term Perspective: Avoid making knee-jerk reactions based on short-term market movements. Focus on the long-term goals of the SMSF and ensure that the investment strategy remains aligned with these objectives.
- Ensure Sufficient Liquidity: Reassess the fund’s liquidity needs to ensure there are enough liquid assets to cover expenses and benefit payments during periods of market volatility.
Get professional investment advice from our team of SMSF advisers in Brisbane
Navigating the complexities of SMSF investment strategies can be challenging. Our team of SMSF advisers are here to help you develop a tailored strategy that aligns with your retirement goals. We provide expert guidance to ensure your SMSF is compliant, diversified, and optimised for long-term growth. Book in a free consultation with one of our SMSF advisers in Brisbane.
SMSF investment strategy FAQs
Can I buy property through my SMSF?
Yes, SMSFs can invest in residential and commercial properties, but there are strict rules regarding usage and compliance. For example, you cannot live in a residential property owned by your SMSF, and all transactions must be conducted on an arm’s length basis.
What happens if my SMSF investment strategy is non-compliant?
Non-compliance can result in significant penalties and the potential loss of the fund’s concessional tax status. Ensuring your investment strategy adheres to ATO regulations is crucial to avoid these consequences.
Should I seek professional advice for my SMSF investment strategy?
Yes, consulting with an investment adviser can help ensure your strategy is compliant and aligned with your financial goals. Professional advice can provide valuable insights and help you navigate complex investment decisions. Book a call with an investment adviser in Brisbane today.
How often should an SMSF strategy be reviewed?
Regular reviews are essential, especially after significant market changes or life events. This helps ensure your investment strategy remains aligned with your goals and risk tolerance.
How much super do I need to make SMSF investment worthwhile?
While there is no set minimum, it is generally recommended to have a substantial balance (e.g., $200,000 or more) to justify the costs and complexities of managing an SMSF.
How an investment adviser at Solace Financial can help you with your SMSF
Navigating the complexities of SMSF investment strategies can be challenging. Our team of SMSF advisers in Brisbane is here to help you develop a tailored strategy that aligns with your retirement goals. We provide expert guidance to ensure your SMSF is compliant, diversified, and optimised for long-term growth.
Book a free consultation with one of our financial advisors to learn more and get personalised advice tailored to your financial goals.
