There are many different SMSF strategies out there. It seems that every financial planner and punter on the street has different ideas on how to get the best out of an SMSF.
In some respects your SMSF strategy shouldn’t be too different from any normal investment or retirement planning strategy, as we all know that superannuation is simply a tax-friendly environment for growing our retirement savings.
Given the long term outlook of the average SMSF, some people argue that a buy-and-hold strategy is best for an SMSF. On the other hand, some argue that your SMSF is the perfect place to trade shares or other assets.
Let’s take a look at a few of today’s popular SMSF strategies:
Shares – Long Term
A popular SMSF strategy is to fill your fund with blue chip shares from the ASX and sit back to enjoy the long term growth and dividend income.
Given that most SMSFs are seeking long term growth, this doesn’t sound like a bad strategy at first.
However, if you’re just going to stick your money into blue chip shares, why not go with a cheaper index fund through a non-SMSF provider? That way you’ll get a similar type of exposure, but without the added cost of an SMSF.
Of course this could change if you have a very large balance, where the SMSF fees will become more attractive, but a buy-and-hold strategy using shares may not be the greatest strategy for an SMSF.
That’s not to say it’s a bad strategy, but perhaps not the best.
Shares – Short Term
Trading shares in the short term has always been a popular SMSF strategy, and in the current environment it seems to only be gaining popularity amongst SMSF and non-SMSF investors alike.
Pre-GFC, a buy-and-hold strategy worked well as the market continued its fairly consistent rise. Up until the ‘crash’ many investors thought they simply couldn’t lose with this strategy.
During the GFC and even now in its wake, it has become evident that to make money in shares you really need to be trading with the ups and downs of the market.
Of course the average SMSF holder or their broker / adviser will not be able to pick all of the troughs and peaks of the market, but a sense of timing and knowing when to take profits or cut losses can certainly bring rewards.
A volatile market such as the one currently experienced can be a great time for smart investors, and no doubt many SMSF holders will be profiting handsomely right now.
But be warned, as day trading, or even frequent trading, can rack up big loses just as easily (or more easily in fact) than it can bring in profits. If you don’t have the experience, knowledge or time to trade properly, you should really seek advice from a professional investment adviser or broker.
Property, especially residential property, has been a favourite investment for Australians over many years. When it comes to saving for retirement, property investment has also become one of the more popular SMSF strategies.
Property really picked up when the rules around SMSF borrowing were relaxed, and investors were able to borrow money through their SMSF to purchase property. Up until then, only those with large balances had sufficient funds for such a large purchase.
There are plenty of positive in this SMSF strategy, but there are a couple of downsides that must also be considered.
Many people who have used their SMSF to purchase property have ended up with very poor diversification, as such a large percentage of their retirement funds are now tied up in a single asset.
Generally a balanced fund may have a 10%-15% allocation to property, but these SMSF funds are ending up with 90%+ allocation not just to property, but to a single property.
If property was to suffer a decline the SMSF could suffer a similar decline. Worse still, because the exposure is to a single property, there are a dozens if not hundreds of potential risks which could severely damage the properties value, or at best simply result in a lack of growth over many years.
Plenty of Australians have made plenty of money through property investing, and with the ability of SMSFs to borrow to purchase property this trend is likely to continue.
SMSF strategies are heavily restricted when it comes to investing in assets which are related to or associated with the trustee or beneficiary of the fund, but there is one major exception.
Your SMSF may purchase a commercial property that your own business operates from, provided that market rate rent is paid from your business to your SMSF.
This can be a great strategy for an SMSF, and one that plenty of people are using, but keep in mind the issue of diversification if a large percentage of your retirement savings are locked up in that single asset.
Cash and Fixed Interest
The last of the SMSF strategies we’ll look at is the idea of placing all of your retirement funds into cash and/or fixed interest securities.
After the GFC many investors went down this path believing that their money would be safer. Yes it is safer than shares and property, but there are other risks.
You are risking that your super will still grow sufficiently to achieve your retirement goals. You are also risking that your super will even keep up with inflation.
If you do wish to go heavily into cash, it may be a cheaper option to choose an industry fund or a no-frills retail fund and choose their cash option. This will generally save you SMSF audit and administration costs, whilst still accessing the same cash investments.
Which is best?
As with most investment strategies, there isn’t a single SMSF strategy that will suit all investors better than any other strategy.
The right strategy for you will depend on many different factors, such as the expected time frame for your SMSF, your attitude towards investment risk, your need for growth and many other factors.
Your own experience and knowledge may also lead you towards certain SMSF strategies. For example a professional real estate investor will generally choose to leverage their experience in the industry and apply this to their SMSF via a property investment strategy.
Likewise, a successful stock broker will likely want to leverage off of his skills and industry knowledge to grow his SMSF using share trading.
Whichever way you go, it’s always a good idea to seek advice from someone you trust. This could be from a licensed financial planner, or even just a friend or acquaintance who has had success with their own investments.
Your SMSF gives you a lot of freedom in choosing your investment strategies, so choose wisely!