Diversification is an important principle in investing and managing any investment portfolio, including self-managed superannuation funds (SMSFs). Understanding how to effectively implement diversification as a risk management technique to your SMSF can be pivotal in the prudent financial management of your self-managed super fund, however, the Superannuation Industry (Supervision) Act 1994 also requires SMSF trustees to specifically consider diversification every year.
So, let’s talk about SMSF diversification!
What is diversification?
Diversification involves spreading your investments across a variety of asset classes and investment types with the aim of reducing risk. The goal of diversification is to avoid having all your investments subject to the same market or economic forces, as different assets may perform differently under various conditions.
Some SMSF trustees fail to adequately diversify their SMSF portfolios, whether due to low balances, oversight, or becoming blindsided by investment preferences. The fact remains that diversification within self-managed super funds is not only one of the many vital responsibilities of SMSF trustees, but can also be audited through the ATO.
What impacts SMSF diversification?
Asset classes
SMSFs can invest in a wide range of asset classes, including cash, term deposits, Australian and international shares, direct property, fixed income, and more. Each asset class has its own associated risk and return profile, and diversifying across different classes may help balance out overall portfolio performance.
Risk tolerance
The risk tolerance of the members of the SMSF may influence the level of diversification available in an SMSF. Some members may have a higher risk tolerance and be willing to invest in riskier assets, while others may prefer a more conservative approach. Diversification should align with the risk tolerance of the SMSF members.
Individual investments
Within each asset class, SMSF trustees may be able to diversify further by investing in different individual securities. For example, rather than investing all funds in a single company’s stock, they may choose to spread the investment across several companies from different industries. However, SMSF investments are many and varied. For a lot of SMSF trustees, they are interested in purchasing an investment property within their fund.
While direct property investment offers the opportunity for a self-managed superannuation fund to diversify into asset classes they otherwise wouldn’t have, the SMSF investment strategy must be updated to ensure that the fund is able to invest in direct residential property or commercial property. Furthermore, it remains important to ensure that the property value doesn’t skew the fund’s existing asset allocation and therefore make it more difficult to achieve a suitably diversified portfolio.
Who can assist with SMSF diversification?
Managing an SMSF can be complex, and diversification decisions can significantly impact long-term outcomes. Seeking professional financial advice is the best way to ensure your SMSF’s investments align with the fund’s goals and comply with relevant regulations.
Remember that SMSFs must comply with superannuation regulations and the sole purpose test, which requires the fund to be maintained for the sole purpose of providing retirement benefits to its members. Diversification should not compromise the fund’s compliance, so accessing the relevant professional assistance is of utmost importance.
Adding an investment property to your SMSF investment portfolio?
Purchasing property within your SMSF can be an exciting experience, but one that does require professional assistance. SMSF Loan Experts are here to help with your SMSF property investment funding needs.
Talk to the team today about how we can help your self-managed super fund borrow to invest in property!
