Avoiding bad investment habits with SMSFs

May 16 2016
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SMSFs are continuing to shy away from high-growth assets and preferring the safety of cash, often with negative consequences for their fund.

Avoiding bad investment habits with SMSFs

A significant chunk of SMSF investors repeat the same patterns year in and year out, to their detriment.

A rise in the number of SMSFs to record numbers during the December 2015 quarter highlights the appeal of DIY investing, but many SMSFs are still shying away from high-growth assets and preferring the safety of cash.

The fact is cash doesn’t build wealth over the longer term. Each year, the inflation rate edges up on average between 2 and 3 per cent, so that means that value of your cash is declining by that rate in real terms.

SMSF holdings of cash and term deposits hit a record $155.4 billion in the December quarter, up from $154.5 billion in the previous quarter. Cash investments now represent 26 per cent of total SMSF assets. Total SMSF assets reached a fresh high of $594.6 billion during the December quarter, up 2.7 per cent from $578.9 billion in the September quarter, according to Australian Tax Office (ATO) statistics.

Australian shareholdings jumped 6.3 per cent to $178.4 billion, up from $167.9 billion in the September quarter, accounting for 30 per cent of all SMSF assets. Against that, just $1.9 billion was invested directly in offshore equities, according to the ATO data.

The number of SMSFs totalled 566,735 as at 31 December, with 1,075,267 members. Their assets accounted for 30 per cent of the total superannuation asset pool of $2 trillion, so it’s a huge and fast-growing sector.

But too many SMSFs are falling into the trap of investing in assets that they know rather than into a more diverse range of equities, which over the long term would help to growth wealth at a much faster rate than cash or even property.

A report from the ASX and Russell Investments, the 2015 Long-term Investing Report, shows that over the 10 years to December 2014, shares are the winner.

After-tax returns for investors on the lowest marginal tax rate, as many retirees are, was 7.4 per cent for Australian shares, compared to 6.2 per cent for residential investment property and 2.8 per cent for cash. For people on the highest marginal tax rate, after-tax returns for Australian shares was 5.3 per cent versus 4.9 per cent for residential property and 1.8 per cent on cash. So shares were ahead in both cases, with franking of dividends helping lower-income earners in particular.

But even over the short term there are advantages to investing in shares over cash and property. The reality is, you can make a quick dollar. For people who bought into BHP Billiton shares in January, for example, at around $14, they would have been up by 21 per cent by the end of March with a price of around $17. While you can lose money, that’s the risk that inevitably comes with such handsome rewards.

But not all equities are equal and it’s safest to spread your bets. Like investors everywhere, Australian investors have a strong bias towards bank and mining shares. A greater exposure to a more varied group of companies would help to build wealth more effectively over time and reduce the risk of betting on a few selected blue-chip shares.

So, whether you are saving for retirement or are an SMSF, there’s some food for thought.

Tim Eisenhauer, managing director, OnMarket BookBuilds

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Retirement