Lessons learnt by SMSF trustees during market meltdown

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Lessons learnt by SMSF trustees during market meltdown

Written by John Maroney, CEO, SMSF Association

First published in The Sydney Morning Herald on 16 February 2021. Licensed by Copyright Agency. 

To put it mildly, 2020 was a harrowing year for investors. For Self-Managed Super Fund trustees, many sitting on their life’s retirement nest eggs, it was even more so.

On February 20, the S&P/ASX 200 Index closed at a record 7162.5. By March 23, it was floundering at 4546 – a drop of 36.5 per cent.

And it was not just equities; listed property was a major casualty, while volatility and a lack of liquidity defined fixed-interest markets.

Then sharemarkets did a remarkable U-turn – almost in inverse proportion to the spread of COVID-19 – to the extent that the sell-off and recovery occurred in time spans that were unprecedented.

The benchmark ASX index closed out the year not far from where it started.

It is crucial for SMSF trustees to absorb some of the lessons that such crises can provide and keep them in the memory bank for future reference.

First, the importance of having a well-diversified SMSF investment strategy with a long-term goal is highlighted at times of high market volatility.

It prevents panic selling when markets are falling and also puts SMSFs in a good position to buy quality blue-chip shares at depressed prices before markets rally.

One of the interesting phenomena to emerge from the post-March rally was how it was driven by retail investors, with many institutions remaining less than convinced that the recovery was real.

However, the crisis also put the issue of institutions gaining preferable treatment to share issues ahead of retail investors back on the table.

In the wake of the March crash, companies looking to raise capital quickly offered deep discounts to the “top end of town”, choosing to bypass most retail and SMSF investors.

In this technological era, treating all shareholders equally for capital raisings should be feasible, so, hopefully, this issue will garner some government attention.

Second, trustees got a reminder of the importance of keeping a sufficient cash balance in their SMSF to make pension payments (the rule of thumb is two years). By doing so, they can avoid selling assets at depressed prices.

While the federal government agreed to reduce minimum pension limits when the heavy economic toll of COVID-19 became evident, thereby helping SMSFs to meet pension payments, trustees cannot necessarily rely on such regulatory relaxation in future.

Third, COVID-19 highlighted the need for trustees to keep good records of their decision-making processes, with the Australian Taxation Office and government relief measures demanding up-to-date paperwork to substantiate trustees’ eligibility.

Finally, some of the SMSF relief measures around related-party tenants in investment properties and related-party loans are complex, so having access to specialist SMSF advice – and knowing when to access it – has proven mighty useful for trustees.