• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

SuperGuide

Superannuation and retirement planning information

  • SuperGuide Premium
  • Account
  • Log In
  • SuperGuide Premium
  • Account
  • Log In
  • How super works
    • Super for beginners
    • Super rules
    • Employers guide to super
    • Super contributions
    • Super and tax
    • Accessing super
    • Super news
    • Women and super
    • Super tips and strategies
    • How-to guides
    • Super quizzes
    • Superannuation Q&As
    • Superannuation glossary
  • Super funds
    • Best performing super funds
    • Super fund rankings
    • Best performing pension funds
    • Pension fund rankings
    • Super fund average returns
    • Super investing strategies
    • Comparing super funds
    • Choosing a super fund
    • Choosing an investment option
    • Super fund fees
    • Insurance and super
    • Super fund profiles
  • SMSFs
    • SMSFs for beginners
    • SMSF administration
    • SMSF checklists
    • SMSF compliance
    • SMSF investing
    • SMSF pensions
    • SMSF strategies
    • SMSF Q&As
  • Plan your retirement
    • Retirement planning for beginners
    • When should I retire?
    • How long will I live?
    • How much super do I need?
    • Will I get the Age Pension?
    • How much will I spend in retirement?
    • Financial advice
    • Retiring overseas
    • Preparing for retirement
    • Retirement planning strategies
    • Retirement calculators and reckoners
  • In retirement
    • Income in retirement
    • Super lump sums
    • Super pensions
    • Age Pension
    • Working in retirement
    • Life in retirement
    • Senior concessions and services
    • Aged care
    • Estate planning
    • Super death benefits

Home / SMSFs / SMSF investing

How to achieve genuine diversification in an SMSF

August 3, 2020 by Alexandra Cain Leave a Comment

Reading time: 4 minutes

Once again it has taken a major market correction to highlight the high (and sometimes extreme) levels of correlation between different asset classes. Where once it was assumed returns from different asset classes such as shares and bonds were uncorrelated – and sometimes they are during ‘normal’ market conditions – during times of stress all asset values fall.

Which makes it extremely difficult for self-managed super fund (SMSF) investors to find assets whose values move in different directions at different times, to help protect the portfolio’s returns.

“The list of unusual intermarket relationships is extensive, but diversification has become increasingly difficult to obtain. That does not, however, negate the long-term benefits of diversification. Over time, asset allocation decisions drive a high proportion of returns in a portfolio,” says Tony Davison, senior financial adviser at Pride Advice.

The current climate has been instructive about the power of genuine diversification, says Morgan Collins, senior financial adviser with Lane Financial. “During COVID, we’ve seen opportunities arrive in gold, credit markets and alternative strategies that can be used to mitigate downsides in equities and property.”

SMSFs that had been exposed to these asset classes would have likely performed better through this period than funds that had been overweight in shares and property.

It’s also worth noting ATO rules require SMSFs to be appropriately diversified. In 2019 the ATO sent letters to more than 17,000 SMSFs that hold 90 per cent or more of their investments in one asset class, advising them to further diversify in order to comply with SMSF rules.


Advertisement
SuperGuide Premium is ad-free

What does a well-diversified portfolio really look like?

Davison says despite market turmoil, what constitutes a diversified portfolio has not changed. “Many investors split their portfolio into two broad categories: growth and defensive assets. They invest half of their portfolio in growth asset classes like shares. The other half is in defensive assets like bonds and cash proxies.”

Within each of those categories, there should be exposure to a spread of asset classes such as international shares, Australian shares, property and real assets, and government and corporate bonds. “Exposure to an individual asset class subset should reflect a slightly more tactical or nuanced view. For example, you may wish to be underweight to Australian banks or property at any given time,” he says.

Collins says a well-diversified portfolio would ideally contain a mix of Aussie equities, global equities, property and infrastructure. It may also include exposure to defensive assets such as sovereign and corporate debt and some high yield fixed interest investments. “Depending on the capital available to the SMSF, diversification can come from exposure to real assets as well.”

Paul Bourke, a director of ID Accounting and Wealth Solutions, notes diversification provides opportunity. “A diversified investor has an opportunity to divest their cash into undervalued asset classes. A concentrated position does not allow for this flexibility.”

Additionally, it’s important to consider your assets outside super when ensuring your portfolio is truly diversified. “The mix must be right. So if you are overweight in one asset class outside of superannuation, you might wish to focus on other asset classes within your superannuation,” says David Hancock, a financial adviser from Montara Wealth.

Correcting mistakes

The most common diversification mistake SMSFs make is still being over-exposed to Australian stocks, in particular banks. This is especially problematic at the moment, says Davison.

Compare super funds

Read more...

Advertisement

“In the last three years, a portfolio concentrated in Australian financials has underperformed the ASX 200 by close to 30 per cent. Investors usually try to defend this by citing attractive dividends and franking credits. But, as they are learning, this was a transient trend and dividends may be under pressure for up to five years,” Davison says.

The flipside of this is not enough exposure to assets outside Australia. “The rest of the world offers exposure to different companies and sectors. Another issue is that many SMSFs are sitting on vast amounts of cash. They could consider investing in a blend of Aussie government and investment-grade corporate bonds to address this,” he adds.

Bourke agrees it’s important to be diversified not only across asset classes but also within asset classes. “Holding a handful of Australian shares concentrated in the banks and Telstra is not diversifying within the share market. True to label diversification will spread risk within asset classes across many industries and sectors. But I see so many SMSF portfolios concentrated on two asset classes – property and cash. They then throw in a few blue chip shares and call it diversification.”

He says many SMSF funds are also not actively managed, which compounds the risks associated with a lack of diversification. “Trustees pick a handful of shares and call it diversification and don’t revisit or review those shares for many years. This creates skewing within the portfolio and potential risk. It can create issues with the investment strategy and create compliance problems.” 

Davison says there is an easy solution to this challenge. “These issues can be overcome with a robust, strategic allocation to a core portfolio of diversified ETFs, coupled with a nuanced portfolio of bespoke, trustee selected assets.”

Another common mistake when it comes to diversification, says Collins, is using the fund to buy a single asset like a property. “There’s only a few good reasons to do this. You’re young enough to realise the long-term benefits of gearing you can’t do with other assets, outside of warrants. Or it’s a commercial property for your business and you are saving rent by paying your super fund instead. This can be corrected by ensuring you only go down this path when there is capital to diversify, or a high level of contributions to do the same.”

Advertisement

With markets in a never-before-seen paradigm, it’s critically important for SMSFs to properly diversify their assets. At the start of a new financial year, now’s the time to review the assets in the fund and assess whether it’s truly diversified, to right-size the portfolio for inevitable future shocks. 

Want to learn more about running an SMSF?

Become a SuperGuide Premium member and access expert guides for SMSFs, on topics such as costs, compliance, administration, investment, borrowing and pensions. Discover valuable super and retirement strategies, the most popular shares, managed funds and ETFs for SMSFs, the latest super rates and thresholds, contributions caps and more.

Includes more than 500 articles, how-to guides, checklists, tips, calculators, case studies, quizzes and a monthly newsletter.

Find out more


Learn more about SMSF investment in the following SuperGuide articles:

SMSF investment rules: Collectables and personal use assets

October 15, 2020

What are the SMSF borrowing rules?

August 6, 2020

How to create an SMSF investment strategy (including example documents)

August 6, 2020

How do SMSF retirees invest?

March 14, 2020

10 steps to buying a commercial property and leasing it to your SMSF

February 12, 2020

What on earth is an in-specie transfer?

January 15, 2020

How to invest in infrastructure through an SMSF

October 1, 2019

ETFs: How do I use them and what do they cost?

June 19, 2019

SMSF guide to hedging

May 1, 2019

SMSFs and property: A Super Guide

April 5, 2019

The definitive SMSF guide to franked dividends

April 2, 2019

SMSF investment rules: What every trustee should know

February 15, 2019

Related topics

SMSF investing SMSFs

IMPORTANT: All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs. You should consider whether any information on SuperGuide is appropriate to you before acting on it. If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Learn more

© Copyright SuperGuide 2009-21. Copyright for this article belongs to SuperGuide Pty Ltd, and cannot be reproduced without express and specific consent. Learn more

Primary Sidebar

How super works
Super for beginners
Super rules
Employers guide to super
Super contributions
Super and tax
Accessing super
Super news
Women and super
Super tips and strategies
How-to guides
Super quizzes
Superannuation Q&As
Superannuation glossary
Super funds
Best performing super funds
Super fund rankings
Best performing pension funds
Pension fund rankings
Super fund average returns
Super investing strategies
Comparing super funds
Choosing a super fund
Choosing an investment option
Super fund fees
Insurance and super
Super fund profiles
SMSFs
SMSFs for beginners
SMSF administration
SMSF checklists
SMSF compliance
SMSF investing
SMSF pensions
SMSF strategies
SMSF Q&As
Plan your retirement
Retirement planning for beginners
When should I retire?
How long will I live?
How much super do I need?
Will I get the Age Pension?
How much will I spend in retirement?
Financial advice
Retiring overseas
Preparing for retirement
Retirement planning strategies
Retirement calculators and reckoners
In retirement
Income in retirement
Super lump sums
Super pensions
Age Pension
Working in retirement
Life in retirement
Senior concessions and services
Aged care
Estate planning
Super death benefits
Advertisement
Compare super funds

Join SuperGuide Premium and give your retirement plans a boost.

Get access to independent expert commentary on the latest super, retirement and SMSF issues, including the top performing super and pension funds, how much super is enough, the latest super rates and thresholds and new super measures and strategies.

You’ll have access to more than 500 articles, how-to super guides, checklists, tips, calculators, reckoners and other tools, as well as a monthly newsletter.

Find out more

Footer

Important: Disclaimer

All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs.

You should consider whether any information on SuperGuide is appropriate to you before acting on it.

If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions.

Learn more

About SuperGuide

SuperGuide is Australia’s leading superannuation and retirement planning website. Learn more

Superguide Pty Ltd ATF Superguide Unit Trust as a Corporate Authorised Representative (CAR) is a Corporate Authorised Representative of Independent Financial Advisers Australia, AFSL 464629

  • Contact us
  • Advertise on SuperGuide
  • Careers

Before using this website

  • New to SuperGuide?
  • Terms and Conditions of Use
  • Financial Services Guide
  • Privacy Policy and Privacy Collection
  • Copyright Policy
  • Editorial Policy and Complaints
  • Disclaimer

  • SuperGuide Premium
  • Subscriber feedback
  • Sitemap