What’s the Purpose of an SMSF Investment Strategy?
An investment strategy for your self-managed super fund (SMSF) is a legal requirement, designed to assist Trustees when making investment decisions for the Fund.
The SMSF Investment Strategy must be clearly articulated – the ATO recommends it is written down – to keep members aligned with the Fund’s purpose, which should be tailored to the particular circumstances of your Fund and it’s members – not just to repeat SMSF legislation.
It’s important to get the balance right when creating an investment strategy for your SMSF. It needs to reflect a well-defined strategy without being too narrow, and deal with all relevant considerations – including associated risks so that you successfully generate a sustainable income in retirement for its members.
Building Your SMSF Investment Strategy – Considerations
Relevant circumstances when tailoring your SMSF Investment Strategy may include (but are not limited to) personal circumstances of the members such as their age, employment status, and retirement needs, which influence your risk appetite. Common factors include:
- Desired level of investment returns
- The degree of investment risk you are prepared to accept
- Diversification and liquidity of the Fund’s assets
- Asset allocation ranges
- Investment monitoring and decision making process
- Use of borrowings (if any)
- Life insurance needs of members
- Ability of the fund to pay benefits to retiring members
- Ability of the fund to pay ongoing costs
Your strategy should also explain how your investments meet each member’s retirement objectives.
Legal restrictions surrounding SMSF investments are naturally, a major consideration for trustees when building an SMSF Investment Strategy. These restrictions aim to protect fund members from being overly exposed to risk and aim to ensure consistency with the over-riding objective of providing retirement income to members.
An important part of this includes the commercial ‘arm’s length’ requirement – that is, any investments can’t be associated with any trustee, including property. And the purchase and sale price of fund assets should always reflect true market value. The income from fund assets should always reflect a true market rate of return.
The ATO requires the investment strategy to be reviewed on a regular basis so it remains effective, based on the circumstances of the Trustees. The ATO currently recommends an annual review of your SMSF Investment Strategy.
Tracking your investment strategy
Once you’ve completed your SMSF Investment Strategy, and your Fund is up and running, it’s very important to monitor performance and compare it to a pre-determined point of reference. This benchmarking applies common standards to help to measure your portfolio and inform your tracking toward the Fund’s goals.
Traditionally, strategies have been assessed against benchmarks for each asset class. But it’s also possible to assess the strategy against the objective itself. The benefit of doing it this way is that the objective will be not just to beat a benchmark, but to ensure you have enough assets to fund your retirement.
What’s Next?
Does your SMSF have an up-to-date Investment Strategy? Are you confident it will adequately provide for your intended retirement lifestyle? Why not talk to your financial adviser today to ensure you’re on the right track.