Whenever I review the investment section of a problematic SMSF, the areas I find that are commonly poorly done are:
The Investment Strategy
Appreciation of risk
Inadequate Investment Strategy
More often than not, I find the investment strategy is either missing, out of date, or it has been trivialised to the bare minimum necessary to pass an audit. It appears to me to be one of the least respected documents in the SMSF suite.
I find that the investment strategy is rarely the driving force it should be, which is a shame because it represents such a great opportunity to set up the fund for success. Whilst administration and compliance are necessary priorities, it is ultimately the investment strategy that will achieve your retirement goals.
Lack of appreciation of risk
It is common to see an SMSF investment portfolio that is not consistent with the innate risk tolerances of its members. If the trustees have moved away from cash, it is common to see investments that are way too risky for the members. If the members do have an appreciation for the underlying risk, it can mean many sleepless nights worrying about it.
Trustees typically do not fully understand risk, for example:
The risk of not understanding individual comfort zones and tolerances
Risks associated with speculating rather than investing
The risks of holding too much of one asset type, including cash
Risk by not understanding investment correlations
Risk by not understanding the role of insurance in managing investor risk.
So the aim of your Investment Strategy is to pull together investments that work well for you; that are inside the comfort zones of members, without raising stress levels. Paying attention to protection is critical.
Poor asset allocation
From what I see, there is a major gap in know-how when it comes to choosing assets to invest in within the SMSF environment. With no training and little previous experience, trustees find themselves suddenly charged with the responsibility for investing hundreds and thousands of dollars, or even a million or more.
It is little wonder that people tend to hold a lot of money in cash. Trustees I talk to simply don’t know what to do. This is ironic because one of the widely promoted advantages of an SMSF is the wide range of investment possibilities.
How to research, what to invest in, identifying and managing risk are the biggest challenges that SMSF trustees face. However, the trustees who solve the investment conundrum are the ones most likely to achieve their financial retirement goals.
So it is a matter of experience and getting the balance right; a balance that I should point out is different for every SMSF, and varies among members of the same SMSF.
This is general advice only. The purpose of this article is to provide you with education in SMSF investment, which is a difficult area. As a licenced financial advisor, I strongly urge you to seek personal advice based on your individual goals, needs and circumstances, before making any decision about self-managed superannuation.