SMSF Investment StrategiesSharing Simple Strategies for Self Managed Super Funds
Investment Strategy Part 1: Why have one?
This is Part 1 of a four part series of posts on Preparing the Investment Strategy for your SMSF (the complete series can also be found on the Articles page). I was planning to commence this series of posts after I completed the series on My Life Story but after my conversation with my mother-in-law and what I read in a few articles this weekend, I feel convinced that I should do these posts first. July is the first month of the new financial year and probably the time when most people take stock of how well their investments have done in the past year and are thinking about what they should do for the following year. I guess it is not unlike people doing their New Year’s resolution at the start of each calendar year.
Why do we need an Investment Strategy for a SMSF?
For many people, the primary reason for doing it is for compliance, as it is a requirement from the Australian Tax Office (ATO) for SMSFs to have one. As most new SMSF trustees have no idea what is required to comply with this, some accountants I know have come up with services to help new trustees (for a fee of course) to prepare their investment strategy. Most investment strategies I have seen are very generic with a few broad statements on asset allocation. Asset allocation is defined as a broad range, probably so that you will not need to update it frequently, even when you change your investments. A typical example of this type of investment strategy is:
Cash 10-20%
Australian shares 20-80%
International shares 0-30%
For us, the investment strategy should be more than a compliance document. It should be your “Master Plan” for how you invest your funds. Kingsley is a Project Manager and I have also managed consulting projects in the past. One of the most important document that a project manager must prepare before starting a project is the project plan. A popular saying in project management is “failure to plan is equivalent to planning to fail”. Our investment strategy is our plan which guides us on how we execute investment decisions for our fund. It should be specific and tailored to meet your needs and you should not be afraid to change it if your initial assumptions change. Kingsley and I have updated our Investment Strategy twice in the last 2 years. When we started SLI Super Fund in March 2007, there was a bullish stock market and a booming economy, so naturally we wanted to allocate more of our funds to shares but when the subprime crisis started and the bull market showed signs of topping, we decided to move to the safety of cash. It is not difficult to change an investment strategy for a SMSF – all you need to do is to call a meeting of all the trustees and agree to the changes, write it up, sign the document and send a copy to your auditor.
I think having an Investment Strategy and reviewing it regularly is a good idea even if you do not have SMSF. You may have your super assets with one of the public super funds but you still have the ability change your investment allocation within your fund, or change funds if yours is not a top performing fund (see my June 12, 2009 post Start an SMSF for the Right Reasons for more details). For most people, the investment strategy for their super is “set and forget” so I was not surprised when I read this article “Best and Worst in Super” on the Superliving.com.au website which said “In short, and despite the temptation to blame the super industry itself, reality says that nearly all consumers have had, for over a decade now, the ability to switch investment options within their own fund. Most pre-retirees (82%) appear, whether through apathy or intentionally, to sit contentedly in balanced and growth-style investment options. Just 3.8% of monies have been moved away from these options in the last 12 months“. We are equally guilty of this. Even though we have most of our funds our SMSF, we still had some funds in a few retail super funds. One of the funds was a growth fund with one of the major retail super fund providers and we were quite shocked to find out when we checked the company website on the weekend that the one year return for this fund was -23%!
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