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SMSF – Your questions answered, day 12 – what are 12 tips for SMSFs?

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The AFR put together a nice 10-point plan for making sure you whip your self-managed super fund (SMSF) into shape but a couple of important, no, crucial matters were not rammed home.

Nowadays, there are more than 400,000 SMSF or DIY funds and the calibre of how they are run ranges from professional to hopeless. In fact, some people who are stuffing around running their own fund would be better off in an industry fund or an above-average super fund run by a financial institution. Note, I said an above-average fund.

Top 10

Now, this AFR report was written by John Wasiliev, who is a great writer on the subject of super, and here’s what he highlighted as the top 10 points. Let me sum them up and throw my two pence in.

1. Make sure your cash at call in your fund is at the best rate of interest possible. I would add be careful about the size of the balance you have in such an account.

2. Don’t forget fixed interest investments. Most money in SMSFs are split between cash accounts or trusts and shares but with five-year fixed accounts now offering seven per cent at banks, it’s time to think about it. Mind you, maybe a shorter period would be wiser as interest rates are expected to rise further over five years.

3. Dump mortgage trusts and cash enhanced funds as they have been unreliable. I have no argument with this tip.

4. Don’t be a lazy investor. Read all of your correspondence, participate in share purchase plans and go to AGMs. In short, get professional about managing your SMSF.

5. Don’t delay starting a pension. If you are 55, you could create a smart strategy using the transition to retirement provisions but I reckon you would need to get some expert advice. You could do your homework but advice would be smart.

6. Replace expensive managed funds with cheaper indexed funds and/or ETFs. I often argue this but I reckon you need to make sure you are not overexposed to shares. Diversification is important when you create your own super fund.

7. Be careful about investing large sums in one go. The warning is about timing the market, which a lot of advisers argue is really hard to get right. There’s no one right answer but being mindful of how a market has been running can help you enter the share market more profitably. However, it’s no cake walk. I do like regular entries with a set amount of money to create a dollar cost averaging effect.

8. Regularly review your investments and strategy. Can’t argue with that, but I would also add that you should think about rebalancing your portfolio, which a lot of people don’t understand nor do.

9. Can you justify having a fund? This is an important question. Remember that an industry fund costs less than one per cent and so if your returns are not beating industry funds and your costs are more, then you might want to rethink your SMSF strategy.

10. Understand your risk appetite and invest accordingly. That’s great advice but this is easier said than done and that’s why lots of people should at least start a fund with a trustworthy adviser.

Two more

I would add these two really important pieces of advice to these timely ten tips:

11. You must approach this SMSF initiative with the attitude that you will be your own professional fund manager. You have to live and breathe the stuff, at least once a week, to be on top of the issues.

12. You have to have the right asset mix and be properly diversified. I recall a viewer of my SWITZER program on Sky News Business Channel emailing me in early 2009, asking me if he should go to cash in his super fund. He was over 60 and had had $1 million in seven great blue chips companies and at the bottom point of the stock market crash it had shrunk to … wait for it … $300,000! As an adviser, I could not advise him on TV as I need to know his circumstances, his risk appetite and his goals but I did indicate that I thought a market turnaround looked close. I also recall persuasively talking to my clients around that time who were scared and wanted to go to cash. This shows the value of having an objective set of eyes when it comes to running a SMSF.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Friday, January 07, 2011

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