SMSF Investment Strategies

 Nearly 18,000 SMSF trustees received a letter in September 2019 from the ATO...with love...about SMSF investment strategy. It pointed out a lack of diversification.

The question is: What should an SMSF investment strategy look like? How should it look?

ATO Letter :>

What did September 2019's ATO letter about SMSF investment strategies say? The ATO wrote,

Our records show that 90% of your SMSF investment strategy's funds may be held in one asset or one class. Your fund could be at risk of not meeting the... the SIS Regulations diversification requirement. You, as trustee, are responsible for ensuring that your investment strategy conforms to the needs of the law em> 

The ATO then gets the big stick. They might have been worried about not being taken seriously. They continue to do so.

If your investment strategy does not meet these requirements, you could be subject to an administrative penalty of $4,000.

The ATO then concludes by getting the auditors involved.

"We will also be writing to your auditor to inform them of our concerns. If your auditor finds that you have not rectified any non-compliance with these requirements, this could lead to the imposition of the penalties as mentioned above.

Your auditor will likely contact you if you or your client has large assets in an SMSF with an LRBA attached.

Investment Strategy

An investment strategy must be in place before your SMSF can make any investments. The process should consider the members' investment goals, set targets and determine the level of exposure to each sector.

Every year, you should review your SMSF strategy to ensure that it is current and consider any changes in personal circumstances, market conditions or changing insurance needs.

Times change

As an example, consider term deposits. Many SMSFs have held term deposits at rates of 4.5 to 6.6% for the past ten years. However, rates are falling now. Trustees should reconsider this strategy and evaluate their risk tolerance.

You could also consider shares. Twenty years ago, a lot SMSFs held the four banks Woolworths, BHP and Telstra, and some term deposits and possibly property. That was all. However, things have changed since the GFC. Exposure to assets overseas can have many benefits. You will be able to access a wider range of sectors, such as IT, healthcare, and social media, that aren't available in Australia.

Diversification

Diversification options are more diverse than ever before.  SMSFs   can now access managed funds and ETFs through a platform, making diversification much easier.

Age brackets

You are not eligible for the super guarantee if you're over 70. If this is you, then you likely have a portfolio that you don't get from superannuation. You also had unlimited contributions for quite some time, which allowed you to build up a reasonable superannuation account.

You are more likely to have a larger portion of your superannuation if you're between 50-70 than if you're over 70. But, the property boom may have helped you build a substantial investment portfolio beyond superannuation.

Your primary wealth, aside from your family home, is super if you're under 50. Due to increasing property prices and higher mortgages, it is impossible to have sufficient wealth other than

 super. You are more likely than not to use superannuation in the future as your main wealth-building tool.