An SMSF’s compulsory investment strategy could be accurately described as its anchor and its navigator. And the current bout of sharemarket volatility highlights the need for an SMSF to have plenty of ballast.
That’s more than enough of the nautical analogies.
Perhaps one of the most overlooked positives of self-managed super is that fund trustees unlike individual investors are legally required to have an investment strategy.
Accepting this compulsion is one of the trade-offs, albeit positive, for receiving the benefits of the super system, including its concessional tax treatment and asset protection.
And when markets become extremely unsettled as we are now experiencing, countless SMSF trustees no doubt really appreciate the discipline and direction that should come from having a properly-prepared, appropriate and periodically-reviewed investment strategy.
The sorts of things that SMSF trustees are required to consider when preparing their fund’s mandatory investment strategy include the things that individuals investing in their own names should also think about.
When the prevailing period of intense sharemarket volatility settles, investors without a proper investment strategy or plan are likely to be prominent among those who conclude they have made some costly mistakes. Such mistakes include switching out of shares into all-cash portfolios – after prices had already sharply fallen.
SMSF trustees are required to prepare, implement and regularly review an investment strategy that has regard to the whole circumstances of their fund.
These circumstances include a fund’s objectives and investment policy to achieve those objectives, investment risks, likely returns, liquidity, investment diversity, risks of inadequate diversity, ability to pay member benefits and whether to hold life insurance for members.
Although fund trustees must consider diversification when preparing an investment strategy, they are not legally required to diversify their portfolios.
Research conducted last year for the SMSF Association found that one in five SMSF trustees for their funds do not have a written investment strategy. (The tax office, as regulator of SMSF super, emphasises that a fund’s investment strategy should be in writing).
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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