by Patrick Garrett Self-managed super funds (SMSFs) are a rapidly growing investment structure, accounting for a third of Australia’s $2.2 trillion superannuation pool. SMSFs can help savers have more control of their savings management and choice of investment options.
SMSFs come with administrative requirements and are not suitable for everyone, but in today’s world, where trust in the traditional way of letting others manage your money has been eroded by the revelations of the Banking Royal Commission, people are seeking better, more trustworthy options to meet their investing and financial needs. While robo-advice is a new concept for some investors (click here to read more about how it works) it’s an excellent option for managing part or all of your SMSF assets.
Six Park recently sponsored the SMSF Expo in Melbourne, an event aimed squarely at empowering and educating SMSF trustees and people who are considering an SMSF. My team spent three days listening to stories and answering questions and several key themes emerged.
What’s the impact of lower fees?
The impact of fees on your investments is huge – keeping your costs low should always be a core focus of your investment strategy.
When your costs are low, you keep more of your investment returns – that means there’s more money to reinvest and compound into the future. Every dollar you save in trading commissions and management fees is a dollar you retain for investment and earnings potential.
In the example below, both people have invested $250,000 at the age of 40. One is paying 0.4% in fees; the other is paying 2% in fees.
If each portfolio returns 7%, the investor paying lower fees will have $1.15 million by the age of 65, while the investor paying 2% will only have $780,000 at the same age.
The investor with lower fees could draw down $90,000 a year until the age of 88. The investor paying higher fees would only be able to draw down $60,000 a year and would run out of money five years earlier, at the age of 83.
Making a smart decision today to lower your fees can make a huge difference to the quality of your retirement. Six Park’s management fees are no more than 0.5% – click here to see our transparent Combine low fees with smart management to get the best of both worlds.
Why is diversification so important?
In investment terms, diversification means spreading your investment “eggs” across a range of “baskets”. ATO stats show that most SMSF portfolios are poorly diversified, holding 75% of their investments in just three asset classes – Australian shares and listed trusts, cash holdings, and domestic property.
The problem is even worse for smaller SMSFs, which usually hold more than half their assets in cash.
Diversification within an asset class is often just as important as being diversified across different asset classes, especially if you hold Australian shares. Most SMSFs have less than 20 stocks, most of them in the financial and resources sector. A big swing in one of these stocks or sectors can have a serious impact on overall returns.
Six Park’s portfolios are diversified across seven different asset classes with different characteristics; there are growth and defensive assets; there are Australian and international assets.
Over time, these assets complement each other to benefit your portfolio (click here to learn more about how this works). In the 12 months to the end of March 2018, our portfolios have returned between +2.3% and +6.4%. In the same period, the ASX200 has returned +2.3%, meaning even Six Park’s most conservative portfolio has outperformed the ASX200. This shows the benefits of being diversified across different geographies and asset classes.
What is an ETF?
ETFs are exchange-traded funds. As the name implies, they are funds that are traded on an exchange – they can be bought and sold on the share market in the same way you might buy or sell shares in CBA, Woolworths or BHP.
ETFs are a growing part of the financial landscape, representing more than $37 billion of funds under management in Australia. nabTRADE figures show that SMSF investment in ETFs grew 55% in the 12 months to 15 December 2017.
Rather than investing in just one asset, ETFs invest in a basket of assets. These assets might be shares, bonds, property, currencies or commodities, usually with a focus on a specific region, industry or market. When you buy an ETF, you buy an interest in that ETF’s basket of assets. With a single transaction, you are well on your way to a diversified portfolio.
Most ETFs give investors exposure to an underlying index or asset class. Some track a niche market, such as gold or a currency, while others track a broad index with hundreds of holdings such as the S&P/ASX200 Index or S&P500 index.
ETFs buy every (or almost every) asset in the target index, usually in the same proportion that those assets are represented in that index. So if an Australian shares ETF is tracking the S&P/ASX200 Index, it will own each of the stocks in that index, in the same proportion as in the index. As those index weights change with stock or market movement, so too does the proportion of each owned by the ETF.
By mimicking the holdings of an index, ETFs mimic the performance of their targeted index, and with low costs and high tax efficiency.
Six Park uses a different ETF for each of its selected asset classes. You can read more about the ETFs we use here.
What does all this mean for your SMSF?
So what does all this mean for you and your SMSF? Well, investing is hard (especially if trying to pick individual stocks and time the market), and the investment management world often presents itself in pretty complex ways. But there are actually fairly simple ways to now get professional investment management guidance in a transparent, affordable way.
Many Six Park clients use our service as part of a core-satellite strategy (as shown in the graphic above), with Six Park forming the core of their investment strategy while other assets continue to play a role. This allows trustees to get the benefits of a diversified, low-cost investment portfolio while retaining their other investment interests.
Six Park combines technology and automation to lower costs and optimise your investments. We help you by taking the hard work out of diversification to give you a transparent, affordable way to diversify your investments. And Six Park is not aligned with any financial institutions – we don’t accept commissions or pay anyone for recommendations. We can form part or all of your investment strategy depending on your needs, and our SMSF partner Heffron can help you with administration and compliance if you’re setting up a new SMSF or would like to transfer from a current provider.
Click the “Get started” button below to get your free investment recommendation.