Lessons from super fund investment strategy rules

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Lessons from super fund investment strategy rules.


If you’re looking to grow and protect your retirement wealth, there are some important lessons you can learn from the investment strategy rules of super funds.

Superannuation laws require trustees of every super fund, including Self-Managed Super Funds (SMSFs), to put in place an investment strategy that meets certain guidelines. Interestingly, these guidelines contain valuable messages that every investor can learn from.

Summary


Risk and Return

Diversification

Liquidity: How easy is it to get to your money?

Insurance


Risk and Return

SMSF trustees must decide on an acceptable level of risk and expected level of return when investing for their members – taking into account the members’ risk profile, proximity to retirement and other relevant circumstances. This decision is reviewed regularly as the members’ needs change. If the members of an SMSF have different risk profiles, the trustee may hold separate pools of assets to ensure the funds are invested appropriately for all members.

The main thing to remember is that growth assets offer a greater chance of higher returns, but also have a greater risk of experiencing a loss.

When you’re planning for retirement, it's important to consider what return is required to help you achieve your objectives and what level of risk you are comfortable with for your investments. -This applies for your other investments, like direct shares and investment properties, as well. Determining your own risk profile, which may change at different life stages, is a vital step so that you and your financial planner/adviser/adviser can make sound investment decisions in line with your financial goals.



Diversification

Super fund trustees must also regularly review whether the fund’s investments are adequately diversified. This is because a lack of diversification can also increase an investor’s risk exposure.

Diversification is a strategy of spreading your money across different asset classes, industries, market sectors or geographic locations. Diversifying across asset classes helps to manage risk if one specific asset class performs poorly – for instance, if the share market drops, your lower returns can be offset by the interest earned on your defensive assets, like term deposits.

A diversified portfolio of industries and market sectors within a specific asset class can also help you manage market risk. For example, when the mining industry suffers from lower overseas demand, the tourism industry may be booming due to increased international tourism.



Liquidity: How easy is it to get to your money?

SMSFs in particular must have appropriate levels of liquidity so they can fund their ongoing operating costs.

Liquidity is just as important if you don’t have an SMSF but are saving for retirement. How much can you afford to keep in super (where it’s generally locked up until you retire) and how much should you invest outside super? You also need to consider how much should you keep in cash, and how much in other, less liquid, asset classes.



Insurance

The final investment strategy requirement is for SMSF trustees to consider whether their members have access to adequate levels of life and disability insurance. Similarly, if you’re the household’s main breadwinner or the primary carer for your dependants, you need to consider how your financial plan could quickly unravel if you were to suffer a serious illness or pass away.

Be sure to check with your financial adviser to make sure your personal insurance cover matches your current lifestyle needs.

What does it all mean to me?

When you’re investing for the future, a carefully considered investment strategy can make all the difference. Remember, your financial adviser should be your first port of call when working out the right strategy for you – and adapting it to meet your changing needs as you move through different life stage.

 



Making the decision to see engage with our financial planning services means that you want to make a positive difference to your personal financial future. We truly believe everyone needs a financial plan. We can help you to understand the intricacies of investing, taxation, and the ever-changing legislation around superannuation. Our finance advice can really make a difference to you by helping you identify realistic goals, and put strategies in place to achieve them.

Are you ready to take control of your personal finances?
Get the SMART team working with you. Call SMART Business Solutions Financial Planning on 03 5911 7000 or
reception@smartfinancialplanning.com.au.

 

Important information: This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.