Knowing exactly what needs to be considered before getting your asset allocation right inside (or outside!) a Self-Managed Super Fund (SMSF) is not just a smart move in terms of obeying strict SMSF regulations. It is also a fantastic exercise in developing a broader investment discipline.

No matter your age, gender, risk profile, objective or income, for every investor there is a single golden rule–diversify. It is a truth universally acknowledged that a diversified investment portfolio is likely a safer one, as it will potentially weather storms in a more balanced fashion than a portfolio that is heavy with one specific asset or asset class.

Members of SMSFs are required by regulation to consider the diversification of their fund’s portfolio. The law insists that SMSF members put in place an investment strategy that considers diversification (among other factors) and review it on a regular basis. Then members must ensure their fund’s asset mix matches their investment strategy document.

But what should this consideration involve before such a document is written? How does an SMSF member, or anybody with an interest in the responsible and reasoned diversification of their portfolio, ensure they are asking the right questions of their own risk appetites and resulting asset class percentages?

Each SMSF member or investor will have different reasons for diversifying. For some it will be for greater chances of balancing risk and return in turbulent markets. For others it will be to take advantage of opportunities in various geographical locations. Some will diversify because of the varying time requirements of particular asset classes, holding some asset classes for longer than others and constantly re-balancing.

How do you figure out your own risk profile? Seek professional advice for an in-depth analysis, but it has a great deal to do with your stage of life, and therefore how much time you can afford to wait out the various ups and downs of the market. It also involves other considerations. How much do you have to invest and how regularly? How do you feel about seeing your portfolio fluctuating in value? What are your individual tax circumstances?

Regulations specific to SMSFs outline the fact that you must show consideration to five essential points before writing your investment strategy. These are:

1 Consider the risk and likely return from the fund’s investments taking into account the member’s needs and circumstances.
2 Consider the solvency of your fund. In other words, can it afford to pay benefits to members when required, and pay its own bills such as auditing, accounting and legal?
3 Analyse the role and level of diversification in your fund. What is its purpose? What are the risks if there is inadequate diversification?
4 Analyse the level of liquidity of the fund’s assets, and the role and purpose of this liquidity.
5 Is there insurance for members within the fund? You must be able to prove that you have at least considered whether the fund should hold insurance for SMSF members.

In the world of Australian SMSFs, cash and shares are the front runners, with both typically making up around 30% each of an average fund’s total assets.1 Property, including commercial and residential, takes third place with an average of less than 20% of each fund’s value.

There are several other asset classes that can be considered for ownership within SMSFs, and it is a good idea to seek professional advice on exactly what is and is not allowed. Listed property trusts, foreign property and managed funds tend to be accepted. Artworks, precious metals and vintage cars etc may also be allowed, but professional advice should be sought before purchase. More complicated financial vehicles such as warrants and derivatives also require special advice.

Interestingly, in certain situations if you currently own your business’s commercial property, then the SMSF can buy the property from you under a Limited Recourse Borrowing Arrangement at market value, then you rent it back from the fund. This may mean lower tax on rental income and eventual capital gains tax on sale, compared with holding the property outside of super.

There are many very specific rules and regulations for assets held within an SMSF. For instance, if an investment benefits you at all now, instead of after retirement, then it is unlikely to be allowed in your SMSF. Please seek professional advice as penalties can be serious. Don’t just assume you can make your holiday house a part of your SMSF.

Examples where you may breach superannuation investment rules include:

1. Expensive artworks that are held as an investment inside your SMSF cannot be kept hanging on your walls at home, but instead must be stored in a reputable art storage facility and must also be insured.
2. Staying in an investment property, or allowing friends or relatives to stay in the property, is also a big no-no if that property is held within an SMSF.
3. Market value must be paid for everything held within an SMSF, meaning all transactions must occur at arm’s length. You can’t make a purchase from a family member at mate’s rates. If it is difficult to avoid such a clash, please seek professional advice.

If you wish to discuss SMSF diversification further, please contact our expert and award winning SMSF advisors. 

Call (02) 4926 2300 or email us here at Leenane Templeton.

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You have heard us talk about investment asset allocation or diversification, but we thought it might be a good idea to expand on that explanation to show you how it affects your investment portfolio.

You already know that asset allocation is spreading the money in your portfolio over a mix of the different investment types available, but what is the right mix and does “one size fit all?”

As with anything personal, your own financial portfolio must suit your specific needs – both now and in the future. So, with each of your objectives and timeframes in mind, the most important aspect to look at when determining your investment spread is risk.

There are three types of risk that must be considered:

1. General market risk – largely dependent upon economic conditions;
2. Market sector risk – a particular sector of the market, e.g. industrial vs resource stocks;
3. Specific risk – a particular share or property.

As you can see, each risk is affected by different factors, so the best way to manage all types of investment risk is to ensure that your portfolio is adequately diversified to cater for volatility and over-reactions. Put simply: when one goes down, another goes up.

Once the risk factors are taken into account, it’s time to look at the specific assets within the portfolio, investing across cash, fixed interest, Australian shares, international shares and property. All of which will provide something unique at the different points of the investment cycle.

Remember that the longer you plan to invest, the more important good diversification becomes. This further minimises risk and your growth potential is maximised.

We hope this explanation helps you to understand why we’re so focused on the right asset spread for you.

Call (02) 4926 2300 or email us.

If you have any questions about asset allocation or your personal portfolio, please contact our expert team of financial planners here at Leenane Templeton.

The post Asset allocation to reduce risk appeared first on Newcastle Financial Planners & Financial Advisors.

The prevailing investment environment underlines the value of ensuring that an investment portfolio is appropriately diversified in accordance with your personal circumstances – including your risk tolerance, your present and future needs and the investment timeframe.

Other investment basics for an investor to consider at all times, irrespective of what the markets are doing include:

• Regularly review your long-term asset allocation investment strategy and rebalance your portfolio to ensure it fits with your asset allocation
• Review your investment costs and research alternatives to ensure your costs are kept to a minimum.  There is no need to pay for services that you don't use.
• Know the companies in which you invest.  Don't have so many stocks that you can't keep up with what is happening in the companies.
• Remember that a dividend is the company paying you for the use of your money.
• Remember that a little and often does work.  In investment terms this is called dollar-cost-averaging when you invest amounts at regular intervals so as to even out the costs of the stock.  By buying regularly you can buy more stocks when the price is lower and less stocks when the price is high, so you average out the price and reduce the risk of investing large amounts before a price fall, and also reduce the risk of making an investment which is emotionally driven.  Align this with a review in investment costs to ensure you have an optimal scenario.

What do successful long-term investors say?

• Patience is your friend
• When buying shares, think like a prospective owner of a business
• When making a stock market investment, if you don't plan on holding it for 10 years then don't waste more than 10 minutes considering it
• You don't need a lot if good investments, you need a few outstanding ones
• Keep investment costs to a minimum. This is one of the factors over which investors have much control.
• Practise dollar-cost-averaging. This involves investing regular amounts in the sharemarket at regular intervals.  In this way, you buy more stocks when prices are lower and fewer stocks when prices are higher. You average your buying costs and reduce the risk of investing a large amount shortly before a fall in share prices.

Are you an investor?

Speak with one of our Newcastle financial planners and investment experts today to help with your investments and self managed super funds

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