SMSF Investment StrategiesSharing Simple Strategies for Self Managed Super Funds
Investment Strategy Part 2: What should be in it?
This is Part 2 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). The Australian Tax Office (ATO) has issued a guideline for what should be in your investment strategy, which can be found on the ATO website. In a nutshell, the investment strategy document should set out your investment objectives and detail the investment methods you will adopt to achieve these objectives.
Investment Objectives – one of your obvious objectives would be to maximise returns and you can set a target annual return percentage. We set our target at 5% above inflation rate. As the annual inflation rate in the past 5 years is around 3%, our target is for an 8% return per annum. Other objectives could be related to your age, and any other special personal circumstances. For example you may want more income and liquidity from your investments if you are using your super fund to provide you with income for your living expenses.
Investment Methods – The traditional method used by most people is simply to allocate their funds across a few different asset classes as the conventional assumption is that all assets will increase in value over time and spreading your money over a few asset classes will minimise your risk. This is similar to public super funds where you could choose your own allocation over a few asset classes like cash, fixed interest, Property, Australian shares and International shares or select a pre-mixed option like Growth or Balanced.
The asset allocation method is a passive method which would suit people who have little time to manage their super funds. With your own SMSF, you can fine tune your allocations even more. For example, for Australian shares, you can choose which sectors you want more exposure to and which sectors you may want to avoid. For International shares you can choose which countries you may want more exposure to. Using Exchange Traded Funds (ETFs), you can choose to have exposure to Emerging Markets or a specific country like China. In my earlier posts I also mentioned that you can gain exposure to alternative asset classes like gold and other commodities using ETFs as well. All it takes to implement this method of investing is perhaps to review the performance of each asset class and rebalance your portfolio once a year, or when there is a significant change in your original assumptions when you set up that portfolio, as mentioned in my earlier post. But is it enough these days to simply allocate assets across different asset class as a way managing risk and getting the return you want? Last year all the asset classes mentioned above except cash and fixed interest, fell in value . Cash is currently only generating a return of 3-4% in this country and even less in other countries where interest rates have been slashed to 1% or less.
Staunch believers of this investment method may say sure we had negative returns for the past two years but we had positive double digit returns the three years before that so the target return should be achievable if you average over a period of five to ten years. I think the best answer for this is not to look at historical returns but rather look forward to what you think will happen to the global economy in the next few years. Two years into the financial crisis, I think everyone agrees that the main cause of the crisis was over leverage due to cheap and easy credit. According to the economists who correctly predicted the economic downturn, the expectation is for long period of deleveraging and with that slow growth. Growth predictions from the IMF are equally subdued, especially for developed countries like the US, Europe and Japan who have the biggest economies in the world. Although the downturn has shown signs of easing, I just cannot see the kind of growth in shares and other assets classes that we have seen from 2003 to 2007 happening in the next few years.
Originally, we planned to use the asset allocation method for our super fund but when we found we could not achieve our investment objectives, we decided we had to try some new methods which I will talk more about in the next post.
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