Invest
Is your SMSF portfolio really diversified?
Diversification is an important consideration for an SMSF trustee when formulating the fund’s investment strategy. Here we take a look at what that means in practical terms.
Is your SMSF portfolio really diversified?
Diversification is an important consideration for an SMSF trustee when formulating the fund’s investment strategy. Here we take a look at what that means in practical terms.
Alongside ensuring the SMSF is maintained for the sole purpose of providing retirement benefits to its members, SMSF trustees are obliged to consider diversification as a part of their fund’s written investment strategy.
Why diversification is important for SMSFs
Diversification aims to spread your SMSF’s investment risk so that if one asset performs below expectations, the performance of other assets can offset this and keep your fund on track to meet its investment objectives.
Diversifying across uncorrelated assets, such as shares and bonds, also makes it possible for investors to lower the volatility of the portfolio.
The idea here is that because these asset classes typically move in different directions in response to a certain scenario, such as an interest rate move, the portfolio can generate more consistent returns.
Investing across asset classes can also help with another thing trustees must consider – namely liquidity, or how easily the fund’s assets can be converted into cash.
SMSFs need ready access to cash so they can pay administrative expenses, income tax and minimum pensions when they are due. So, it’s probably best not to have all your fund investments in fixed assets, such as property.
In addition, there are some important risks, such as sequencing risk, that can be minimised through a well thought out diversification process.
What does a diversified SMSF portfolio look like?
For SMSFs, the obligation to consider diversification is commonly expressed as a target allocation for each asset class and the acceptable range of variation from this target.
This then provides a relatively simple way to see how the portfolio aligns with the guidelines set out in the investment strategy.
Within large APRA-regulated super funds, asset allocation will change periodically throughout a member’s life depending on how close they are to retirement, when reliability of income increases in importance. SMSFs would be wise to follow this lead.
Generally, however, while the proportions may change there will typically be a mix of cash, fixed interest, property and infrastructure, Australian shares, and global shares.
The chart below shows these asset classes and their sub categories, which represent different methods of gaining access to them. 
Importantly, diversification is both allocating among a range of asset classes, and then also diversifying within each asset class.
- Diversification between asset classes involves having an asset allocation that consists of a range of different asset classes.
- Diversification within asset classes involves having a range of different investments in each asset class.
How can you make sure you are diversified?
Accessing some of these asset classes can present challenges to individual investors and SMSFs because they may have minimum investment requirements, or other ownership restrictions that add complexity.
Two options providing easy access to diversification are managed funds and exchange-traded funds (ETFs)
A managed fund pools money from multiple investors, then professional managers invest this in a variety of assets, which could be global or local shares, offshore property, infrastructure, or high-yield investments in line with a stated objective.
ETFs, meanwhile, aim to replicate the performance of a particular index or group of assets, effectively giving an investor exposure to an entire market or asset class. For example, it is possible to buy ETFs that track specific share markets (for example the US, Japan, Europe or Australia) or sectors or themes (such as small cap stocks or high yield stocks), or asset classes (such as commodities, bonds or property).
Managed funds and ETFs make accessing investments in a broader diversified manner much easier.
Few SMSF investors can get adequate diversification across international markets. Even domestically niche areas such as small or micro-cap stocks can be handled with less risk using a professional manager.
Again with property, few investors have the ability to gain sector access alone and this can be done with less risk via A-REITS (listed on the ASX), ETFs, managed funds or property syndicates.
Conclusion
It’s easy for SMSFs to become focused on stock picking and trading, activities that are exciting and time-consuming. However, it could be more beneficial to step back and take a broader view and ensure that you have the right balance in the key asset classes and adequate diversification within them. At a higher level, the SMSF investment decisions are simplified, and they may even be more profitable, or at the very least less volatile.
Asset allocation and diversification are the key components of your investment strategy, but you don’t have to face them alone. These decisions are often best tackled alongside an accredited adviser who can help set the guidelines and parameters of the strategy and be a trusted sounding board during regular reviews.
Marcus Evans, head of SMSF customers, Commonwealth Bank
Investment insights
Retailers report strong HY21, with Super Retail set to refund JobKeeper
Certain Australian retailers are flourishing despite the government-mandated temporary store closures in 2020, with JB Hi-Fi reporting good sales growth and Super Retail Group pledging to hand back $1...Read more
Investment insights
Yes, working from home is risky. Here’s how to counter that
Before COVID, 26 million Americans worked from home part-time or full-time, and now that number has tripled. ...Read more
Investment insights
ESG is becoming popular but ‘greenwashing’ is a problem
Sustainable investing is back on the radar as a result of the COVID-19 pandemic, but experts warn that better standards around ESG products are needed to mitigate “greenwashing”. ...Read more
Investment insights
Federal Court case lodged to stop Qantas from outsourcing 2,000 jobs
Qantas is being dragged to court over its decision to outsource 2,000 jobs across 10 airports in Australia as part of a company-wide restructure. ...Read more
Investment insights
Where should you invest when interest rates are so low?
With the cash rate close to zero, this will have big implications for how you should invest your money to generate the best return. So, what are the options and which asset classes will best enable yo...Read more
Investment insights
Dividends in Australian shares – is the COVID lockdown lifting?
What happened during reporting season? Andrew Zenonos asks. ...Read more
Investment insights
How will falling Chinese foreign investment affect the Australian property market?
Foreign investment from China in Australian real estate has been quietly on the decline for several years. It peaked in 2015-16 at $31.9 billion and dropped significantly to $6.1 billion in 2018-19, ...Read more
Investment insights
What makes a dud investment a dud?
A wrong investment is only wrong to the wrong person, an investment director has flagged. ...Read more
Investment insights
Retailers report strong HY21, with Super Retail set to refund JobKeeper
Certain Australian retailers are flourishing despite the government-mandated temporary store closures in 2020, with JB Hi-Fi reporting good sales growth and Super Retail Group pledging to hand back $1...Read more
Investment insights
Yes, working from home is risky. Here’s how to counter that
Before COVID, 26 million Americans worked from home part-time or full-time, and now that number has tripled. ...Read more
Investment insights
ESG is becoming popular but ‘greenwashing’ is a problem
Sustainable investing is back on the radar as a result of the COVID-19 pandemic, but experts warn that better standards around ESG products are needed to mitigate “greenwashing”. ...Read more
Investment insights
Federal Court case lodged to stop Qantas from outsourcing 2,000 jobs
Qantas is being dragged to court over its decision to outsource 2,000 jobs across 10 airports in Australia as part of a company-wide restructure. ...Read more
Investment insights
Where should you invest when interest rates are so low?
With the cash rate close to zero, this will have big implications for how you should invest your money to generate the best return. So, what are the options and which asset classes will best enable yo...Read more
Investment insights
Dividends in Australian shares – is the COVID lockdown lifting?
What happened during reporting season? Andrew Zenonos asks. ...Read more
Investment insights
How will falling Chinese foreign investment affect the Australian property market?
Foreign investment from China in Australian real estate has been quietly on the decline for several years. It peaked in 2015-16 at $31.9 billion and dropped significantly to $6.1 billion in 2018-19, ...Read more
Investment insights
What makes a dud investment a dud?
A wrong investment is only wrong to the wrong person, an investment director has flagged. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
