Is your investment strategy up to scratch?

Co-founder of the Switzer Report
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You can review a sample strategy here. Alternatively, work through these steps for developing an investment strategy, and see how you stack up.

Step 1: Set investment objectives

What’s your investment objective and how will it support your retirement plans? Start by answering some key questions, such as:

  • How old are the SMSF’s members? Are they in accumulation or pension phase? If the former, how many years until they retire?
  • What assets do the fund’s members have both inside and outside the fund?
  • How much income will you need in retirement?
  • What level of investment risk are the members prepared to accept?

The answers to these questions should help you determine the investment objectives, which should be measurable, achievable and able to be communicated to the members of the fund. Examples of these objectives could be a simple statement, such as: “The fund will outperform inflation by 3% per annum over the long term,” or a more complex statement, such as: “The fund will keep pace with inflation while avoiding a negative return in any one year.”

Step 2: Define asset weightings

You’ll need to decide where to invest your assets in the same way professional fund managers carefully determine how to allocate funds across the various asset classes. The investment plan should clearly state the types of asset classes you want to invest in – like equities, cash, fixed interest and property – as well as the percentage weightings (that is, the percentage of the fund that will be invested in that asset) and benchmarks for each asset class.

Different SMSFs will choose different asset class weightings based on their member’s investment timeframe, their level of risk, their need to protect capital, and potentially, their medium-term investment perspective. A fund that is prepared to take on more risk and has a longer investment timeframe is more likely to have a higher proportion of ‘growth’ oriented assets, such as equities and property, while a fund where capital protection is important will most likely have a higher proportion of ‘income’ oriented assets such as cash and fixed interest securities.

The percentage ranges for the various asset classes should be set wide enough to allow for day to day market variation, although not so wide as to render them useless as a monitoring tool.

Step 3: Detail any other specific rules

After the asset allocation has been set in a way that will best meet your investment objectives, the final step is to detail any other investment rules or restrictions you wish to impose on the Fund. These rules can be used to foster diversification, manage risk, maintain adequate liquidity, or strengthen the probability of delivering strong after-tax returns.

Examples of these rules could be:

  • “For the Australian equities portfolio, the trustees must ensure that there are at least five different securities from different sectors in the portfolio.” (Diversification)
  • “No single asset or security in the fund will represent more than 20% of the fund’s total assets.” (Single asset risk)
  • “The Fund will ensure that, at all times, it has at least $10, 000 in a cash deposit with an Authorised Deposit Taking Institution  available within 24 hours’ notice.” (Liquidity)
  • “The Fund will look to take advantage of dividend imputation by having a preference for companies that pay fully franked dividends.” (Tax efficiency)
  • “The Fund will not invest in collectibles such as works of art, rare coins, stamps etc. or other assets where a market value cannot be readily established.” (Defining what assets the Fund can’t invest in).

Investing in ‘in-house assets’ (as defined by the Act), this should be specifically  referenced in your investment strategy.

If you propose to invest in a very material asset such as business real property or in “exotic” assets such as artworks or collectibles, a written strategy will assist in demonstrating that the relevant issues have been considered and that the investment is not ad hoc or reckless. Minutes should be kept recording the decision, and can also be used to document that the decision was reached after consideration of the relevant issues, including:

  • The expected return from the asset;
  • The need for diversification given the investment timeframe and level of risk of the asset;
  • The need for liquidity given the age of the members and the expected time when benefits would start to be paid; and
  • The Fund’s ability to meet ongoing operating expenses from the investment income on the asset.

Step 4 : Insurances and minutes

Since 2015, you  are required to consider whether the Fund should take out insurance cover for one or more of your members. Insurances could be life cover, TPD (temporary or permanent disability) or income protection.

This requirement doesn’t mean that your Fund needs to take out insurance – it just means that you need to consider whether to do so or not. If you decide not to take out any insurance covers, it is probably a good idea to formally record this decision in a trustee minute every year, the same minute you make after reviewing the adequacy of your investment strategy.

A sample investment strategy can be accessed here.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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