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Get your asset allocation right

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The wisdom of assigning asset allocation strategies depending on stage of life, risk profile and end goal is not unique to self managed super funds (SMSF). In fact, it’s universal across the investment spectrum. But within an SMSF the law states that you must review on a ‘regular’ (we say at least annual) basis your investment strategy, including your risk and diversification options. And to tell the truth, it’s a fairly responsible piece of legislation.

The basic questions to ask before developing an investment strategy are around what you’re hoping to achieve in retirement, how you’re planning to reach that end goal and how much risk you’re comfortable to carry along the way. Information from these topic areas should guide your decisions around which asset classes will fill various percentages within your portfolio.

Importantly, each member’s actual asset allocation mix must match what is written in your investment strategy document. This will be checked by your fund’s independent auditor on an annual basis.

What do I need to consider?

Superannuation legislation specifies that your SMSF investment strategy must document the consideration of five key points:

  1. Risk level. You must provide a risk and investment statement for each member of the SMSF.
  2. What is the role and level of diversification within your portfolio?
  3. How liquid or illiquid are your investments? How does this affect your end goal and the possible challenges along the way to achieving that goal?
  4. How solvent is your fund? You have to be sure you can meet the bills of the fund whenever they fall due.
  5. You must now also consider the role of insurance for members inside the fund.

Which asset classes are generally allowed?

The popular investment classes within Australian SMSFs right now are cash (31 per cent), shares (31 per cent) and commercial and residential property (15 per cent). Managed funds, foreign property and listed property trusts are also generally acceptable holdings.

You’ll need to seek professional advice on whether specific types of derivatives, warrants and other structured products are allowed, as well as collectables such as art works and precious metals.

Which asset classes could land you in hot water?

Perhaps most important in terms of asset class is knowledge of the investments generally not allowed within an SMSF. Remember the sole purpose of an SMSF is to provide retirement wealth for the member. With this in mind, some investments could be questioned within superannuation law. Breach this law and the financial penalties can be enormous.

Generally unacceptable investments (all contain exceptions, please check with your adviser/lawyer/accountant) include:

  • Investments that deliver benefits to the member now, rather than in retirement.
  • Loans to members or their relatives. - Non arm’s-length transactions. In other words, everything bought and rented etc via an SMSF must be paid for at true market value.
  • In-house assets, or investments in related parties of the fund (a member’s business, for instance) must not add up to more than 5% of the fund’s value.
  • Assets purchased from a related party, unless those assets are listed shares, business real property or managed funds.

Asset allocation is an important and sometimes complicated issue. We would always recommend it is planned in consultation with your advisor, lawyer and accountant.

Published: Wednesday, March 06, 2013

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