SMSF Portfolio Diversification

Asset classes and diversification

Diversifying your self-managed super fund (SMSF) means including a spread of asset classes such as cash, fixed-interest, property and shares. As well as ensuring that the SMSF has the sole purpose of providing retirement benefits to its members, SMSF trustees are obliged to consider diversification as part of their fund’s investment strategy. 

Particular asset classes will generally perform differently over different periods depending on a range of factors such as interest rates and current market conditions.  By spreading your risk across different asset classes, you are less likely to suffer a big loss because one sector of the market is performing poorly.

Regular review of your investment strategy

A key part of considering an SMSF’s investment strategy is to understand what stage of life the members of the fund are at: are they starting the accumulation of their retirement assets, or are they almost ready to draw down on them? Each stage of life requires a different investment approach impacting the type of property investment that is most suitable for them.

It is important that investment strategies are regularly reviewed based on current circumstances or if changes are made to investment goals.

Why invest in property?

According to the Australian Taxation Office’s (ATO) most recent SMSF report, residential property holdings within SMSFs increased by 17 per cent in the year ending March 2014, from $17.5 to $20.5 billion. This represents just 3.7 per cent of the total $558 billion worth of assets administered by SMSFs throughout this period.

SMSF property investments are predicted to experience continued growth as more people look to gain control over their retirement future. The SMSF Association reported that “Self-Managed Superannuation Funds are the fastest growing super division in Australia,” with more than 1,044,000 members and 550,000 funds.[ii]

The main reason for our increasing interest with SMSF property investment is that, until 2007, it was only an option for those who had enough capital within their existing fund to purchase property outright (ie. without borrowing against the property).

In 2007, the government introduced new legislation that allowed Australians to establish limited-recourse loans to acquire SMSF real estate assets, opening this investment option up to a wider range of investors.

The benefits of SMSF property investment

The residential market has historically returned around 6.8 per cent capital growth per annum (and 3.5 per cent net yield). Property investment is worthy of serious consideration for any SMSF portfolio due to the reliability and consistency of housing as a commodity.

Secure government-backed property investment

Australians seeking secure property investment in their SMSF may be interested in Defence Housing Australia (DHA). DHA investment properties are located in most capital cities and major regional centres. DHA offers investors a guaranteed long-term rental income for up to 12 years, and because DHA is backed by the Australian government, it's a secure investment option.

All of DHA’s investment properties undergo an annual rent review, and your rental income won't fall below the starting figure, even if the property market does dip. DHA will also look after the day-to-day aspects of your investment – paying your rent, managing your tenants and taking care of repairs and maintenance.

Enquire online to find out more about investing with DHA.

Investment is subject to DHA’s lease terms and conditions. Investors retain some responsibilities and risks, including property market fluctuations. The advice contained in this article is for general information only and prospective investors should seek independent advice.

[i] https://www.moneysmart.gov.au/investing/invest-smarter/risk-and-return/diversification, 2015

[ii] https://www.investorsdirect.com.au/whats-all-the-fuss-with-smsfs/, 2015