Is your SMSF adequately diversified?

SMSF trustees need to truly understand diversification and better diversify their portfolios.

The benefits of a well-diversified portfolio are numerous but the key ones that SMSF trustees should focus on are the benefits of mitigating volatility and short-term downside investment risks, preserving capital and the long-run benefits of higher overall returns. By spreading an SMSF’s investments across different asset classes and markets offering different risks and returns, SMSFs can better position themselves for a secure retirement.

The majority of SMSF trustees believe that diversification is important, however, many do not achieve it in practice. This is because SMSF trustees cite barriers to achieving diversification. The top being that it is not a primary goal for SMSF trustees, and they believe they have a lack of funds to implement it.

Another clear problem regarding diversification is the amount of SMSFs with half or more of their SMSF invested in a single investment, eg. real estate property.

The bias and significant allocation to domestic SMSF equities conversely may highlight the fact that SMSFs are not adequately diversified, especially across international markets and other asset classes.

What can you do?

Some of the steps you can take to diversify your retirement savings and control your investments in a disciplined and planned way include:

• Ensuring there is a clear and demonstrable retirement purpose in the choices you make.
• Ensuring you have an investment objective and a strategy to achieve that objective in place.
• Reviewing your portfolio and assessing it against the objectives you have set as often as you feel is necessary.
• Minimising concentration to any one asset class.
• Ensuring your Australian share portfolio is sufficiently diversified.
• Considering the benefits of geographic diversification.
• Ensuring your cash allocation is appropriate.
• Considering the benefits of exchange traded funds, listed investment companies and other digital investment platforms that allow low cost access to different markets.

Always remember to document your actions and decisions, as well as your reasons, and keep them as a record in order to demonstrate that you have satisfied your obligations as a trustee.

Given the importance of having an appropriately diversified portfolio and its impacts on quality of life in retirement, trustees ought to consider professional assistance in managing this important aspect of an SMSF.

Product Disclaimer:
This is general information only. No investment advice has been provided to you. The information in this blog is general information only and has been prepared without taking into account your personal objectives, financial information and needs. You should consider any advice in this blog in light of your personal objectives, financial situation or needs before acting on it. You may wish to consult an accountant and or licensed financial adviser to do this. Hailston + Co assumes no responsibility for any actions you take independently, and without seeking professional advice from your accountant or licensed financial advisor.