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Plan your SMSF investment strategy
All SMSFs are required to have a documented investment strategy. Here’s what to consider when developing your investment strategy, including what you need to know about SMSF property investment.
Not only will a well-documented investment strategy benefit members of the SMSF, but it is a legal requirement. Let's take a look at why it's so important to have a clear investment strategy for your SMSF, the different types of assets you can invest in and what to consider when putting your strategy together.
Why should I have an investment strategy for my SMSF?
How you invest your super through your SMSF will determine how much money you can retire with, and ultimately the type of lifestyle you can live throughout your retirement years. A bit of planning now could mean you retire with thousands (or hundreds of thousands!) more later.
But as well as benefiting you and the other members of your SMSF, it's also a legal obligation. Under the current super laws set by the ATO your SMSF must have an investment strategy in writing that outlines your fund's objectives and strategies for achieving those objectives. This isn't something you can do just once, you're also required to regularly review and adjust the strategy to ensure it's always meeting the needs of members and the fund's overall goals.
Setting your SMSF investment objectives
The objective of your SMSF is the overall goal you're trying to achieve. The ultimate purpose of any SMSF is to fund a comfortable retirement for its members. Try to be as specific as you can with your investment objective by working out how much money your SMSF will need to generate in order to fund the retirement of its members.
For example, some people might be aiming for a simple, but comfortable, retirement that won't require as much money as someone planning a retirement full of overseas travel. You can take a look at our guide on how much money you'll need in retirement to help with this.
Setting your SMSF investment strategy
Now it's time to put your investment strategy together. Your investment strategy should outline what your SMSF will invest in to achieve its objectives.
What you can invest in through your SMSF
You have much more freedom and flexibility with your SMSF investments than you would with a standard retail or industry super fund. The range of assets your SMSF can invest in are almost unlimited. Among the most popular assets for SMSFs to invest in are Australian shares, cash and direct property (residential housing and commercial property).
Some other assets you can invest in include, but are not limited to:
Australian shares: Invest in ASX-listed companies such as Telstra or Woolworths.
Global shares: Individual global companies that aren't listed on the ASX, such as Apple, Netflix or Google.
Exchange traded funds (ETFs): ETFs track a particular index, such as the ASX200 and are a good way to get exposure to a large range of shares at once. The same goes for listed investment companies (LICs). Learn about the difference between ETFs and LICs here.
Commodities: You can invest in popular commodities like gold and silver, or more unique commodities like coffee or sugar.
Residential property: Your SMSF can buy an investment property and rent it out to benefit from both capital gain of the property, as well as regular income from the rental payments. You can read more on property investment below.
Commercial property: You can also invest in shops and storefronts, commercial office space or land.
A business: You can invest in a business and earn some of the profits as investment income.
Derivatives. If you have trading experience, you can invest with high-risk derivative products like CFDs or forex.
Antiques and collectibles. Your SMSF can buy art, antiques, rare coins and collectable items like stamps that could go up in value the longer you keep them.
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
There are some limitations around how you can invest via an SMSF. Here's some things to be aware of when developing your investment strategy:
You can't combine assets. You cannot combine your personal assets with your SMSF assets, these must remain separate. For example, you can't lodge one tax return listing both personal and SMSF assets, these need to be lodged separately with the ATO.
Your SMSF assets cannot be for personal use. For example, if you invest in a property you cannot live in that property.
You must follow the "arm's length" rule. This means you need to invest in assets that are not tied to you or other members, and assets need to perform in line with market expectations. For example, you cannot invest in a property and rent it to a friend at a lower rate.
Assets are held in the SMSF name. Assets need to be held in the name of the SMSF, not individual members.
SMSF property investment
You can invest in residential property as part of your SMSF investment strategy, but there's a few limitations to be aware of first.
You can't purchase the property from another member in the SMSF or another member's relative.
You can't live in a property that's been purchased by your SMSF nor can any of your relatives.
You can't rent the property to another member in the SMSf or to another member's relatives.
You can't rent the property to someone you know for less rent than you otherwise would (in other words, no "mates rates"!)
The property must be bought in the name of your SMSF and kept separate to any personal assets. Investing in property has many advantages including providing rental income as well as capital gain (which means the property itself should grow in value). But there are also lots of costs involved with owning a property, including legal fees, stamp duty, maintenance fees and property management fees.
Because residential property is such a large purchase, especially in major cities like Sydney or Melbourne, you'll need to make sure a property fits within your wider investment strategy. It's a good idea to make sure you have enough funds to invest in a range of other assets too, to ensure your SMSF investments are well diversified.
Tips for developing your SMSF investment strategy
Now that you know what you can and can't invest in, it's time to put your strategy into place. Here's some important things to consider when you're deciding which assets to invest in:
Your life stage. Consider the personal circumstances of all members and what life stage they are in. For example, if the members are all quite young (eg under 40) you may want to invest in higher risk assets like shares and property. If you're closer to retirement you'll probably want less risk, by investing more heavily in cash, term deposits or bonds. This is because high-risk assets generally perform well over longer periods of time, but there might be a few big market dips along the way.
Your risk tolerance. Regardless of age, you should also consider how comfortable the members are with risk. You may be young, but there's no point investing in high-risk assets like US stocks if it's going to keep you awake all night, every night.
What's happening in financial markets. You need to consider what is happening in various financial markets when deciding on your investment strategy. You may want to invest heavily in Australian shares, but it's important to do your research and see how the local share market has performed over recent years. You may find that international shares have produced stronger returns (or vice versa). You need to monitor financial markets and adjust your strategy on an ongoing, regular basis in line with market movements.
Diversification. Don't put all your eggs in one basket. You should invest in a range of different asset classes from the list above, and a range of different assets within those classes too. For example if you're investing in shares, make sure you have a mix of stable blue-chip stocks as well as riskier, high-growth companies. You can read more about the importance of diversification in our guide here.
How much cash you need. Cash is not only a low-risk investment option, but it's also readily available for any expenses your SMSF may need to pay. Your SMSF will have ongoing operating and admin costs, which can't be paid if your money is completely tied up in assets like property.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
Alison Banney is the money editorial manager at Finder. She covers all areas of personal finance, and her areas of expertise are superannuation, banking and saving. She has written about finance for 10 years, having previously worked at Westpac and written for several other major banks and super funds.
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