As a trustee you are required to review your investment strategy regularly to ensure it continues to reflect the purpose and circumstances of your fund and its members. An SMSF investment strategy must take into account the following:
- The risks involved in making, holding and realising the SMSF investments, their expected return and cash flow requirements of your SMSF.
- The diversification and composition of your SMSF investments.
- The liquidity of your SMSF investments, having regard to expected cash flow requirements.
- The SMSF’s ability to pay current and future benefits to the members.
- Whether to hold insurance cover for each member of your SMSF.
An important requirement for you as trustee of your SMSF is to have an investment objective and a strategy to achieve that objective before you start to make decisions about how you want to invest your SMSF’s funds?
Whatever assets you choose for your SMSF to invest in, there must be a clear and obvious retirement purpose in the choices you make. Of equal importance is that the investment objective and strategy is not set in stone. Trustees can choose to change the investment objectives they have set for their SMSF at any time.
At the same time looking at current broader economic risks should also form part of your decision making.
So as an SMSF trustee, your best defence against this uncertainty is to have a clearly defined, well-rounded and long term investment strategy. Not only is your SMSF legally required to have an investment strategy, it is key to guiding you and your fund through uncertain times.
A key aspect of an investment strategy is to consider the diversification of your SMSF’s assets. Diversification of your retirement savings across different assets and regions is key to protecting your fund from volatility in financial markets over the long-term.
While it is important to keep track of events that affect financial markets and your superannuation savings, it is important to remember that superannuation is for the long-term and that sometimes, short-term decisions can do more harm than good. A good investment strategy that keeps members disciplined and focused on the long-term is essential.
With any decisions you make as a trustee in relation to your fund’s investments strategy and asset allocation, the important things to keep in mind are:
- Try to avoid taking undue risks with your underlying investments, which increases the likelihood of short-term losses. For example, think twice before moving from relatively stable shares to speculative shares even if you think a short-term win will come to your SMSF.
- If the fund is considering payment of an income stream, ensure the cash flow from the asset allocation is sufficient to pay the required amount.
- If there is a relatively long timeframe before benefits become payable from the fund, the potential capital growth of the investment is an important consideration.
- Consider the effects of inflation and protect against the reduction in the real value of the fund’s investments.
- All trustees and members of SMSFs have a range of attitudes towards risk and how they see their funds’ investments performing over time. When it comes to the fund’s investment strategy and asset allocation it is important to carefully consider its overall risk profile or tolerance, including the impact of asset allocations on the overall investment portfolio.
Your investment strategy does need to be reviewed at least once a year and this will be evidenced by your approved auditor. It is also important to review your strategy whenever the circumstances of any of the members change or as often as you feel it is necessary. The following practical tips will help you keep on top of your obligations:
- Put your investment objective and strategy in writing.
- Set an investment objective that you can achieve with the underlying investments you are comfortable to invest in.
- There is no template for an investment objective and strategy, but make sure they reflect how you intend to invest your SMSF’s money.
- The investments you actually make must be contemplated by the investment strategy you have set.
- Additionally, document your actions and decisions, as well as your reasons, and keep them as a record in order to demonstrate that you have indeed satisfied your obligations as a trustee in this important area.
This information is provided by ExpertSuper™ Pty Ltd ACN 628 032 888 (Authorised Representative No. 1274492). The information is general information only and does not take into account your objectives, financial situation or needs. You should obtain professional advice before acting on any of this information. Please refer to ExpertSuper’s FSG (available at https://www.expert-super.com.au/wp-content/uploads/2020/02/ES-Financial-Services-Guide.pdf) for contact information and information about any remuneration and associations with product issuers.