In this guide
As with a lot of things in life, knowing you should do something doesn’t necessarily mean you will get around to doing it.
Most SMSF trustees know they should diversify their investments, but not everyone does it – particularly if their fund’s balance is still relatively low.
Having most of your fund’s investment portfolio sitting in one or two assets or asset classes – whether it’s cash, term deposits or property – is an easy path to take, but it’s not always smart, or even in keeping with the SMSF regulations.
In fact, successful institutional investors do the opposite, with research showing a concentration of assets can reduce the investment performance of your SMSF by as much as 3% a year.
Why diversify?
Diversification is a fundamental investment management principle designed to reduce the risks inherent in investing. If your SMSF isn’t properly diversified, it leaves you exposed to significant risk if a major investment or asset class performs poorly.
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The theory behind portfolio diversification was first pioneered by Nobel Prize winner Harry Markowitz in 1952. His work illustrated how owning shares in different industries and countries – together with other asset classes – resulted in smoother overall investment performance without lowering returns. This approach remains the foundation of the investment strategies used by professional investors around the globe.
The rationale for diversification is that similar assets (the technical term is correlated) due to being in one asset class, industry sector or country, have historically moved in the same general direction. This means assets within the Australian share or bond market, for example, all tend to rise or fall at the same time.
By diversifying, you can avoid this tendency, as the pattern of returns for different asset classes tends to be different over time.
As you can see in the table below, share markets both in Australia and around the globe performed strongly in the year to June 2025. The Australian bond market moved back into positive territory in the short term, but the five-year returns were still negative, and that’s before taking inflation into account. Over the long run though, all asset classes have beaten inflation.
Source: Vanguard Australia 2025 Vanguard Index Chart
Although the theory behind diversification sounds complex, it’s simply the old adage, ‘Don’t put all your eggs in one basket.’
If your SMSF portfolio has limited diversification, the potential for losses is greater than if your money is spread more widely.
Combining different asset classes also helps smooth out your fund’s overall investment returns over time.
Diversification? That’s a fail for many SMSFs
Although investment experts encourage SMSFs to take a broadly diversified and risk-adjusted approach to their portfolios, an Australian Taxation Office (ATO) data release in February 2023 showed a different story. At 30 June 2021:
- Cash and term deposits were the sole assets held by 6% of SMSFs
- 8% of SMSFs held all their investments in one asset class, consistent with results in 2019–20
- 46% of SMSFs with assets of $50,000 or less held all their assets in one asset class, compared to less than 15% of SMSFs with assets over $500,000
- 40% of SMSFs held 50% or more of their assets in either cash and term deposits or listed shares.
Although the data indicated limited diversification tended to be more common in lower balance SMSFs, and might increase as balances grow, there are still many funds that fail to adequately diversify their investment portfolios.
Diversification and the regulators
Diversifying your fund is not just a smart investment strategy, it’s also something the SMSF regulators expect to see.
The Australian Securities and Investments Commission (ASIC) considers adequate diversification a key part of running an SMSF. It requires financial advisers to discuss it with their clients and inform them “about the benefits associated with diversification”.
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The SMSF rules also require funds to be appropriately diversified. In 2019, the ATO sent letters to more than 17,000 SMSFs holding 90% or more of their investments in one asset class, warning them to further consider the need for greater levels of investment diversification, or face an administrative penalty.
As the ATO website notes: “While you can choose to invest all your retirement savings in one asset or asset class, risks such as return, volatility and liquidity can be minimised if you invest in a variety of assets … Investing the predominant share of your retirement savings in one asset or asset class can lead to concentration risk.”
If your SMSF isn’t diversified, your investment strategy must document that you have:
- Considered the risks associated with a lack of diversification
- Thought about how the current portfolio meets your fund’s investment objectives, including your return objectives and cash flow requirements.
How diversification improves SMSF performance
Diversification is not just about following the super rules, it can also affect how much your fund members have in retirement.
The Understanding Self-Managed Super Fund Performance, February 2022 study conducted by Adelaide University for the SMSF Association analysed returns from over 318,000 SMSFs from 2017 to 2019. This represented almost 56% of all SMSFs.
A key finding was that SMSFs with more diversified investment allocations achieved higher returns across all the years studied.
The researchers found the least diversified SMSFs, those holding their entire super balance in a single asset class, recorded the lowest returns. SMSFs with more diversified portfolios, even slightly more diversified, all outperformed this group over the study period.
The researchers concluded the benefits of adding a second, third or fourth asset class were “strong and consistent” across the period 2017–19. Each incremental increase in the number of asset classes used by a fund (up to four asset classes) was associated with an improved investment return of between 1% and 3%.
But once an SMSF diversified beyond four asset classes (up to seven asset classes), its performance improved, but only marginally. SMSFs diversifying beyond four asset classes generated anywhere between 0% and 2% in additional return per extra asset class.
As you might expect, SMSFs with high levels of cash and term deposits had lower investment performance than SMSFs holding only 10% to 20% in cash and term deposits.
Although cash reserves are a normal part of any investment portfolio, trustees need to carefully weigh their concern about current economic conditions against the potential impact on their fund’s performance of shifting a high proportion of their investments into cash when markets are volatile or uncertain.
What does a well-diversified SMSF portfolio look like?
While it’s easy to talk about diversifying your SMSF portfolio, there’s no simple answer to what this should contain.
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Ideally, a well-diversified portfolio blends a mix of Australian shares, international shares, property, cash and fixed interest securities (such as bonds, sovereign and corporate debt). Increasingly, SMSFs are also including exposure to alternative assets such as infrastructure and private equity that were once restricted to institutional investors.
Diversification should also be within each asset class to protect against the risk that a single company, bond or property will perform poorly.
At a minimum, the fund’s portfolio should be split across a mix of growth assets (shares and property) and defensive assets (cash and fixed interest). This helps to reduce investment risk and deliver a smoother flow of investment returns.
A well-diversified investment portfolio also needs diversification across geographic regions and sectors. By adding some international shares to the mix, your fund’s portfolio is not solely at the mercy of the Australian economy, as it is if you only invest in local shares.
The domestic share market is heavily concentrated, with financials and resource stocks making up a significant percentage. Australian portfolios often rely heavily on the big four banks, which have served investors well over the years but pose a risk if the banking sector suffers a downturn. Also, if your SMSF only invests in Aussie shares, you miss out on many of the high-growth sectors (such as AI, technology and pharmaceuticals) that are inadequately represented here.
By selecting a range of different sectors, countries and even regions within a particular asset class (such as Australian retail property, European residential and US industrial property), you can increase the odds that different parts of your portfolio will hold their value if others drop.
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Diversification strategies for SMSFs
Tip 1: Spread your investments across asset classes
- Spread your fund’s investments across a range of asset classes or invest in a diversified managed fund or investment option.
- Ensure your fund doesn’t allocate a large percentage of its investment portfolio to a single asset class (such as cash or property).
- Consider adding some non-traditional assets like private equity, venture capital, commodities, global bonds or infrastructure. Gold for example, has a very low correlation with most other investment classes. Alternative assets can be accessed through specialist managed funds and exchange-traded funds (ETFs).
Tip 2: Invest widely within specific asset classes
- Diversify both across and within asset classes. The Australian share market has 11 sectors and 24 industry groups, so select a broad mix of companies.
- Include a mix of different countries and regions within each asset class to protect against local economic conditions and political risks.
- Rebalance your investment portfolio regularly to ensure it doesn’t drift from your established strategic asset allocation.
Tip 3: Use different investment approaches
- Diversify on multiple levels within your SMSF. Consider using different investment styles and vehicles, such as direct Australian shares with international share ETFs, to plug gaps in your portfolio. Good diversification involves diversifying over time periods too, as some asset classes tend to perform over longer periods, while others provide returns over shorter time periods.
- Choose a blend of investment managers who use different investment styles (such as value, growth, multi-asset, active stock picking or passive index investing).
- Use different investment vehicles. While investing directly gives you control, consider adding other structures such as ETFs, listed investment companies (LICs), real estate investment trusts (REITs), traditional managed funds (listed and unlisted) and property syndicates.
- Think about using techniques like dollar-cost averaging. This means you are buying when the market is up (and you get less of an investment for your money) as well as down (and you get more bang for your buck), so your investment cost base is diversified over time.
- Select a mix of both growth and income-focused investments. Investing only for high income and dividends usually comes at the expense of capital growth over time. You need both if you want to money to last. Growth and income investments also tend to perform better at different points in the investment cycle.
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