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Establishing an Investment Strategy

Establishing an investment strategy for your SMSF is a key requirement under Australian superannuation law (read more here).  While there are a number of sample investment strategies available online (like this one from SMSF Warehouse) which can get you started, these documents are really just useful templates and will need to be tailored to match your fund’s particular circumstances and objectives. 

Here are our 4 steps to help you formulate your own SMSF investment strategy:

 

Step 1: Determine Your Investment Objectives

There is no point in having an investment strategy if it doesn’t reflect your investment objectives and those of any other members of your SMSF.

These objectives should also be achievable. As much as we would all like to have an SMSF which aims to amass $1 billion in retirement funds, that sort of goal is probably unrealistic for all but a lucky few individuals. An example of an investment objective which you could consider might be “achieving a long-term rate of return which is X% above inflation”. 

Here are four factors you may wish to consider when formulating an investment strategy: 

  • What are the age of your members and how many years off retirement are they? Funds with longer investment horizons might be prepared to endure higher volatility in the expectation of higher returns
  • What levels of risk are members willing to accept? Each member may have a different appetite for risk, which must be considered.
  • What contributions are expected to be made? Lower levels of contributions might mean your members may wish to invest more aggressively to meet their planned retirement objectives
  • How reliant will you be on your SMSF? The extent to which you expect to rely on your SMSF to fund your retirement will influence the type of investment risks you may be willing to bear

 

Step 2: Define Your Investment Approach

Once you have developed your fund’s investment objective, you need to need to develop an approach for achieving those goals.  This will basically involve deciding how your SMSF will invest its funds. Will your fund invest in just cash? Across shares, managed funds, property and bank accounts? What about less conventional asset classes such as options, warrants, artwork and precious metals? While it is common that you stipulate a broad range of asset classes to preserve maximum flexibility, you should bear in mind that that your fund will only be allowed to invest in those assets specifically permitted under superannuation laws (e.g. non arm’s length activities and certain highly speculative investments are prohibited) and by your fund’s trust deed.

As part of your investment approach, you may also wish to stipulate maximum and minimum allowable investment ranges.  If you choose to do so, you should ensure these ranges reflect your members’ investment timeframes, their level of risk and their need to protect capital.  If your members have longer investment horizons and are willing to take on more risk, then you may have a proportion of ‘growth’ oriented assets, such as shares and property than a fund which is more focused on capital protection.

Bear in mind that an investment strategy does not need to detail the specific individual investments that the fund intends to make. That sort of granular detail is not necessary. Your investment strategy also need not specify a precise percentage that you intend to make to each investment/asset class. 

There is no specific prohibition in the superannuation regulations which stops you from investing 100% of your fund in one asset class. However, where such a strategy is adopted, you will need to detail the reasons why that approach was adopted and how key considerations such as risk and diversification have been addressed.

 

Step 3: Outline other specific rules

Once you have established your asset allocation approach, you should consider whether there are any other rules or restrictions that you wish to overlay in order to help guide your SMSF’s investment approach and/or optimise the fund’s performance or liquidity.

Some examples might include:

  • Specifying certain diversification requirements (e.g. no single asset or security in the fund may represent more than X% of the fund’s assets);
  • Setting out liquidity rules (e.g. a requirement that at least Y% of the funds’ assets be in at call accounts to meet unforeseen expenses); and
  • Considering whether “ethical” considerations must be incorporated in investment decisions (e.g. whether labour standards or environmental or social considerations are to be taken into account in the selection, retention or realisation of any investments). This may be a specific requirement of your trust deed.

 

Step 4: Consider Insurances

Under superannuation law, all trustees are required to consider whether the fund should hold insurance that provides cover for one or more members of the fund. This requirement doesn’t mean that your fund must hold insurance. It just means that you need to consider whether to do so, or not. If you decide not to hold any insurance cover for members, then you may wish to record this decision (and the reasoning) in the investment strategy (or alternatively in a trustee minute).  Click here to learn more about the different types of insurances.

Establishing an investment strategy for your SMSF is a key task. While the web is full of useful resources to help you get started (such as the ATO’s website), it is something which requires careful consideration and thought. As always, you may wish to seek professional guidance advice if you are in any doubt about these matters.

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