SUMMARY: Do you really know the asset allocation of your SMSF? Sit down and figure it out. And be ruthless.
The plight of the DIY super trustee is that it can be a lonely occupation. (Yes, despite there being more than a million of us.)
Decisions are usually made in isolation. They’re made based on liking, or not liking, the story or prospects of a particular opportunity. You have your filters – economists, advisers or analysts who you give some weight to. And perhaps your spouse sometimes assists, as a joint member of the self-managed super fund’s “investment committee”.
However, assets are largely purchased on an ad-hoc basis. Some are discarded the same way.
What often happens, therefore, is that some years can pass by, without much thought given to the bigger picture.
The favourites remain, year after year, whether they deserve your constant loyalty or not. And, sadly, so too do some of the dogs.
I have had some really interesting discussions with trustees who have been running their SMSF for a decade or longer, when sitting down with them and going through their assets.
There are almost always some odd choices in there. Something (or some things) that sticks out, because it doesn’t seem to match with the rest of the portfolio.
Or, frankly, doesn’t belong in ANY portfolio.
The penny dreadfuls, the one-off hybrid security, the share recommendations of once high-flying companies that have now been on life support for years, the managed fund that has been junk for years, or was a clever investment house’s themed “flavour of the month” several years ago.
“Oh, there’s a funny/interesting/annoying story behind that,” is a phrase I am very used to hearing when you question how it came to be in their portfolio.
The stories usually aren’t funny. But what is most unfunny is the number of trustees who don’t sit down to do a rational, “independent” analysis of their portfolio on a regular basis.
This is something that should be done more often than less. But certainly quarterly, if not monthly. “Why is that asset in my portfolio?” Not just the duds, but every single asset. Make the story justify itself.
Before you get to that, there are two things that SMSF trustees should do.
The first is to get a proper understanding of your “risk profile”. If you haven’t done one, do a risk profile questionnaire. There are plenty of free ones around, including on my website. They are not to put you into a box, but to get you thinking about asset allocation.
The second is to get a proper understanding of what is in your portfolio. Do you know what each asset really is? This might seem like a silly question … but you would be surprised by the number of SMSF trustees who don’t understand, at a base level, what some of the assets they’ve accumulated in their portfolio are.
(One of the best ways of doing this is via InvestSMART’s “My Portfolio” tool. Enter your assets. And what you’ll receive at the end of it is a proper look-through of your portfolio, including of the asset class mix. Some assets might be listed as something other than what you thought they were. But if you get a proper asset allocation out of the exercise, then you might find yourself surprised.)
Once you know what you’ve got in the four main asset classes – cash, fixed interest, property and shares – and done a risk profile, you can see if there is a mis-match between what you should have and what you actually have.
Recording the results of these considerations will also be useful for the fund’s investment strategy. Too many SMSF trustees have investment strategies in existence that have, as the acceptable portfolio weighting, 0% to 100% across all asset classes. This will be seen as lazy by the ATO during an audit and a sign of trustees not taking the role seriously, or not being educated sufficiently to act as trustees.
How much do you have in each asset class? Are you comfortable with those percentages?
Were you surprised at how much of the whole portfolio, or how little, was in shares? Property? Cash and fixed interest? From the big picture perspective, do you need to make some wholesale changes there, like shifting 20% of the portfolio out of equities and into defensives (cash and fixed interest)?
Do you have enough international exposure?
Next, asset by asset … does this investment deserve a place in my portfolio?
Try to be independent. But certainly be ruthless. Forget loyalties. Does it belong there? Is there another asset available that could possibly better do the job (understanding that the relationship between risk and return is a pure tradeoff).
You might be holding some assets because they are favourites. They might have performed well over a long period of time. There might some huge capital gains in there.
If you’re in pension phase, holding on to an asset because of a large capital gain, as we know, shouldn’t be a consideration. There’s no tax to pay on gains in pension (except, now, for transition-to-retirement pensions).
But even if you’re still in accumulation, the tax on a capital gain is effectively 10%. Is it worth holding on to an asset that might be fully priced, even over-priced, if there is another asset that is under-priced that could deliver you more of what you want for your portfolio?
Sure, SMSF trustees can offload to others the role of investment manager of the fund to others, including financial advisers. And many do.
But my readers, in the main, aren’t those sort of trustees. They want the investment control.
With that decision comes a responsibility of constant education. And re-evaulation of the portfolio – not just the share holdings in it – on an ongoing basis.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: email@example.com . Bruce’s new book, Mortgages Made Easy, is available now.