Five Strategies For SMSFs To Boost Confidence
On occasion it comes about that SMSF trustees take on the burden of investing on behalf of their members, which can be a worry.
Travelling around the country, I meet a lot of trustees who raise many of the same concerns. I thought I would share some of their concerns with you and provide a few suggestions to help deal with them.
These are five concerns that appear to be outstanding among private investors:
1. I’m holding too much cash, which doesn’t pay enough. How can I get better returns without investing in shares?
Deposits offer low returns because they are low risk. Deposits under $250,000 are government guaranteed, so offer a lot of certainty. Any other investments offering higher returns will have higher risk and the better returns are compensation for that increased risk to your capital.
Bonds are generally slightly higher risk than deposits, so pay higher returns. Bond yields currently range from 4 per cent per annum to 7 per cent per annum. They have set interest payment dates and capital is returned at maturity. While bond prices fluctuate, they are much more stable than shares. We refer to them as ‘sleep at night’ investments.
2. I’m worried that my spouse/partner doesn’t understand financial markets and won’t know how to manage their finances if I pass away first.
If you’re worried about your spouse not understanding enough, find an investment group that will help educate them. Try the Australian Investor’s Association, the Australian Shareholder’s Association or the Association of Independent Retirees. They have groups all over the country that educate and discuss various investment options.
If your spouse is really not interested, consider enlisting some professional help. The SMSF Association and the Financial Planning Association list accredited professionals and can help you find someone to help manage your investments.
If neither of these options suits, invest conservatively in cash, corporate bonds (which will always have a positive return if held to maturity) and limit investments in growth assets - such as shares - that need decisions to sell to maximise returns or limit losses.
3. How quickly can I get my money back if I need it?
Liquidity (the ability to buy and sell an investment easily) is a common concern across many investment classes, particularly for those with large exposures to property, which is seen as "lumpy"; that is, you must sell the entire property or not, you can't partially do a deal. For this reason it’s important to hold assets that have maturity dates and preferably a range of them, say one a year to make sure you can cover unexpected expenses.
A secondary consideration is how easy is it to sell investments to recoup capital. Many fixed or longer term deposits can no longer be broken (you can't change your mind and take money out), with some exceptions of bona fide hardship conditions. Other deposits that were set up some time ago may be accessed in an emergency, but typically there are penalties involved.
Government bonds are very liquid while investment grade corporate bonds are generally liquid and can be sold on a trade plus 3 day settlement term, the same as applies to shares. Read the fine print of managed funds and unit trusts so you know the redemption terms.
4. What is the most effective way to leave some money to care for my children and grandchildren?
Paying for your children or grandchildrens’ education is a common goal for many. However, costs of many items such as education will frequently rise by more than the rate of inflation. Any investment that doesn’t keep pace with inflation will reduce the buying power of that investment in the future.
Rather than investing in growth assets, which have a higher risk profile, long dated infrastructure and inflation linked bond returns are estimated at the outset and I believe they are among the best investment choices if you want to try and keep pace with inflation. You can look for bonds to mature prior to when funds are needed or bonds that repay principal and interest quarterly over a long period to provide a constant cashflow.
Some infrastructure bonds have up to 20 years until maturity.
5. I don’t want to be a run out of money/ be a burden and am worried about health and aged care costs.
Obviously, this issue - incommon with all the questions featured here - can be complex and there are a range of individual circumstances. But as a part of any solution I would recommend long dated infrastructure bonds, which are linked to inflation, offer stability and known cashflows over the longer term. This helps provide confidence to SMSF trustees that their money will last and they will be able to cover medical costs.
Elizabeth Moran is a director of education and fixed income at Sydney-based bond broker, FIIG Securities.
She is a specialist on the bond market and regularly presents at conferences across Australia. Elizabeth is the editor of FIIG's weekly newsletter The Wire and is the is the author of "The Australian Guide to Fixed Income".