Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard/Board Director of the SMSF Association
With the long-term outlook for a lower-return, higher risk investment environment, investors have a particularly strong incentive to have carefully diversified portfolios and sound investment strategies. It is critical to handle these more challenging conditions in a disciplined way.
No doubt, some trustees of Australia’s over 600,000 self-managed super funds – with another 30,000 or so set to join them during 2017-18 – may grumble occasionally about having to prepare and regularly update the mandatory investment strategy for SMSFs.
Yet a thoroughly and diligently prepared and regularly reviewed investment strategy is one of the most significant documents that an SMSF will hold. If used correctly, an appropriate investment strategy should help guide an SMSF through the highs and lows of changing investment environments.
In fact, the fundamental requirements for an SMSF’s investment strategy, as set out in superannuation law, can provide a valuable blueprint for any investor – including those who don’t invest through an SMSF.
SMSF trustees are legally required to prepare, implement and regularly review an investment strategy that has regard to the whole circumstances of their fund.
These circumstances include investment risks, likely returns, liquidity, investment diversity, risks of inadequate diversity and ability to pay member benefits. And trustees must consider the profile of their members, which would include their individual tolerances to risk.
Further, SMSF trustees are required to consider whether to hold insurance for their members.
Superannuation editor Stuart Jones writes in the Australian Superannuation Handbook 2017-18, published by Thomson Reuters, that the “most challenging” SMSF requirement for many trustees is establishing and maintaining an appropriate investment strategy for their funds.
To comply with superannuation law, Jones says that SMSF trustees need to prepare an investment policy statement covering the fund’s objectives, how those objectives are going to be achieved (including through its asset allocation) and its investment strategy.
The preparation and regular reviewing of an investment strategy should prompt trustees to think carefully about their funds, their approach to investment and the changing personal circumstances of each member. Such changing circumstances include, of course, a member’s retirement.
Even if you don’t invest through an SMSF, why not take a close look at the investment strategies that SMSF trustees are required to hold?
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