I am often asked, “Where should my SMSF invest?”, and the answer is always the same … it depends on what you want it to do. An SMSF can hold any allowable (ie non personal use) asset in any currency anywhere in the world, giving significant investment flexibility to your fund.
I encourage people to focus on the investment strategy, and recent changes to the law require regular reviews of an SMSF’s investment strategy. Another common question is, “Should I just set my strategy really wide so I don’t have to worry about it?”, and my answer is always NO. Investment strategies are not compliance documents, and 0 – 100% in every asset class is not an investment strategy, it’s a waste of time. It’s important to know when your fund is not performing the way you want it to, and a good investment strategy will assist you. You set the mandate and if you’re outside that range, you should know about it. Then you can decide if you have to change your strategy or if you need to change your investments. Make your fund work for you by setting a meaningful strategy and then monitor it.
The Superannuation Industry (Supervision) Act is very helpful. It might not be the most exciting read but the Act helps you through the decisions. For example, it has the ‘sole purpose section’, Section 62, which is a broad direction to start you thinking about the purpose of your super.
The Act says that super is for:
- your retirement
- you before retirement if you are no longer able to work
- your family if you die.
So consider where to invest with these points in mind. First, your retirement. Work out when you want to retire and what that means to you. Then you can work backwards to determine what you need to do today to achieve it. Next, super is there if you are no longer able to work, so what if that happens tomorrow? If you don’t have enough assets in the fund, insurance will help. Another of the recent changes to super is a requirement to determine if you (or any member) need insurance. Finally, in the event of your death, where do you want your assets to go? Your family. The Act is designed with your best interests in mind.
This leads to three basic questions before working out what to invest in. What do you need? When do you need it? Who do you want it to go to on your death? The outcome of this clarity of goals leads to your investment strategy and your estate planning.
I often see wills that force all the assets out of the fund into a testamentary trust and then pay them to family members from there. This can be really tax and financially detrimental. Why take something out of a nil tax entity and put it in the hands of a marginal tax payer unless you have no other choice? Show me in your will where it says you want the Tax Office to be a beneficiary under your estate. A little planning goes a long way here.
When you have set your goals, strategy and estate plan, you need to decide exactly what to invest in. This requires a combination of professional advice and making up your own mind. An investment adviser should get to know you and the level of risk you are comfortable with. This is not static and is different for each person. What I think is low risk you might think is very risky. The key is finding a comfort level. If you lie awake at night worrying about your investments then they are too risky for you. Good advisers will help you through this.
There are traps along the way as there are so many things that an SMSF can do. You can get carried away by trying to double your assets overnight but in the real world that is like betting on red or black at the casino. Not a smart way of strategically achieving the goals you set for yourself. Your fund can borrow and this may be a good way to build your retirement assets, but you are adding to the risk. The implications of getting it wrong are significant and you must follow the rules exactly.
Everyone is different so you need to make it your fund and design it just for yourself and your dependents. That’s the importance of self in self managed super, since it’s about you and your family’s future. Get to know your fund a lot more intimately.
Andrew Bloore is Chief Executive Officer of SuperIQ, a leading provider of administrative services for SMSFs.