Diversification is spreading your investments across different types of asset and investment markets. By diversifying your SMSF’s investment portfolio you can reduce volatility, short-term investment risk, preserving capital and in the long-run – higher overall returns.
This is particularly important at the moment with interest rates at record lows and economic uncertainty in a post-COVID world.
Unfortunately, many SMSFs invest half or more of their funds in a single investment. Other trustees say they primarily invest in shares to achieve diversification in their SMSF, while just a quarter say they invest in at least four asset classes. These approaches mean that an SMSF may not be meeting it’s investment goals in fluctuating markets.
How can I fix this?
Luckily, diversifying your investments is a rather easy fix. There are a few simple steps you can take as a trustee to ensure your SMSF is diversified and meeting it’s investment objectives. They are as follows:
• Have a clear and demonstrable reason for the investment choices you make. For example, investing in a particular stock on the ASX for it’s regular dividends.
• Create an investment strategy to outline how you will achieve your goals. This can be as specific or general as you like.
• Review your investments regularly and compare them against your investment strategy. Ensure they are still achieving the return you were looking for and if not, consider disposing of them and investing elsewhere.
• Minimising investments to one asset class – such as fixed interest or property. Particularly as assets such as property can be difficult to move in market downturns.
• Ensuring your share portfolio is spread across different industry types and sectors. For example, while you may own 20 different companies, if they are all tied to the mining industry you are at risk of your entire portfolio suffering if a significant mining event occurs.
• Look into geographic diversification such as international shares or property investment in a different state. This protects you from any localised economic shifts.
• Maintaining enough cash reserves. Holding cash is important to allow you to act quickly on any market movements without requiring you to sell down existing assets.
• Look at alternative ways to invest – you can deal in managed funds and assets such as gold on the ASX without needing to invest directly.
Unfortunately, many SMSFs are failing to actively manage their investment portfolio in response to changing markets. Not doing so can impact quality of life in retirement by allowing you to ride out the worst of any economic volatility – a good example is term deposits, in 2011 you could achieve 6.15% interest on your investment, now you would be lucky to get 1%!
Even though as a trustee you are responsible for the investments your SMSF makes, you are able to seek the assistance a financial planner for specific advice for a suitable investment strategy tailored to your needs.
How can we help?
We can assist in general investment and diversification advice for you SMSF. Alternatively we can put you in contact with a financial planner to make specific advice on any investments.