Everything SMSF trustees need to know about rebalancing

As well as explaining why the trustees think the above allocations are appropriate for members, an SMSF investment strategy might also include a statement like this:

If significant market movements cause any asset class to move outside its nominated range, the trustees will consider whether rebalancing is required at the earliest opportunity or at the next trustee meeting, whichever occurs first.

An investment strategy is not just a guide; it is the fund’s policy document and trustees are expected to follow it. If market movements, contributions, withdrawals or time cause the fund’s actual asset allocations to drift outside the stated ranges, trustees should consider rebalancing the portfolio.

In situations where the SMSF trustees decide to maintain existing fund assets, even where these result in an asset allocation outside the fund’s stated investment strategy and objectives, they should clearly set out, in writing, their reasons for maintaining the actual variance or deviations. This would usually be carried out at the relevant trustee meeting.

Timing

While an investment strategy might state that trustees need to rebalance at the earliest opportunity, when markets are volatile it can be difficult to work out when is the appropriate time to do so.

Trustees who wait for extreme volatility to settle before rebalancing should weigh that against the risk of drifting further from their stated strategy in the meantime.

If we look at the largest single-day fall and the largest single-day rise in the S&P/ASX 200, you will see that these occurred on two consecutive days in 2020, when the COVID-19 pandemic hit:

• March 16, 2020: -9.7% decrease in a single day.
• March 17, 2020: +5.8% increase in a single day.

However, if we instead take a longer-term look at this same S&P/ASX 200 index, it fell 32% from 7,139 points on 14 February 2020 to 4,816 on 20 March 2020 but then recovered to be 6.8% higher (or 7,628 points) by 13 August 2021.

So, in situations where there is an extreme level of volatility, SMSF trustees may decide to hold off on rebalancing their fund assets until markets return to what may be considered normal. Where this is relevant, make sure to maintain trustee records of these decisions.

As SMSF trustees will never know the ‘best time’ to buy or sell fund assets in advance, a more practical alternative may be to regularly review their fund’s asset allocation, or at least annually, and rebalance where allocations have moved materially outside the investment strategy’s stated ranges over an extended period.

Let’s take the simple example of an SMSF with the asset allocations outlined above and a starting balance of $100,000 and look at what happened during 2025.

Investment returns for major asset classes

Source: Schroders Asset Class Annual Returns Tool

Using the above asset class performances, our hypothetical SMSF with a balance of $100,000 at the start of 2025 would have ended the year with allocations and a closing balance as follows:

Even though there may have been periods of volatility during the financial year that may have caused investments in the various asset classes to move outside the desired asset allocation, most allocations ended up within their stated investment bands at 30 June.

The one exception is the total fund allocation to equities. The investment strategy had a range of 0–70%, but the 30 June allocation ended up at 71%, 50.43% for Australian shares and 20.57% for international shares. The SMSF trustees would then need to decide if any year-end rebalancing would be required in this instance or if they feel the small deviation (1.0%) from the stated investment bands is acceptable. In either case, the trustees should minute this decision.

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Costs

Rebalancing an SMSF can involve direct and indirect costs. If equities are held directly, selling shares and buying other assets may involve brokerage and the risk of missing dividends. If managed funds are used, trustees may also need to consider exit fees, buy-sell spreads or forfeited income distributions.

Those costs can add up if rebalancing is carried out several times a year.

Asset-allocation ranges in investment strategies, and rebalancing directives are often applied when a particular asset class may exceed its targeted allocation due to the outperformance of only one or two equities or assets. Rebalancing back to the fund’s originally stated asset allocations, in these instances, prevents trustees from holding on to high-performing assets at the cost of the overall portfolio.

Rebalancing when certain assets or asset classes have outperformed, to reinvest in assets or asset classes with growth potential, also has the desirable effect of selling high and buying low.

Of course, the final decision around holding or selling needs to be made in line with the longer-term investment objectives relevant to each SMSF.

Moving from accumulation to retirement phase

Rebalancing may be more urgent for a fund moving from accumulation phase into retirement phase.

A fund that is commencing a pension or starting an additional pension for another member entering retirement may need more liquidity to meet pension payments. The trustees may therefore need to review and revise the fund’s investment strategy before adjusting the portfolio.

Large superannuation funds

It’s worth noting that large super funds have rebalancing mechanisms and policies built in. For example, during COVID-19 and the government’s early superannuation release scheme, some super funds were required to move out of equity holdings and into cash to accommodate a large number of members reallocating to cash and to fund the significant amount of withdrawals that were allowed under the scheme.

The bottom line

Rebalancing is especially important for SMSFs with concentrated holdings in a single asset class. The impact of one highly performing (or underperforming) share on overall asset class allocations for an SMSF will be much greater for an SMSF with just 10 equity holdings compared to one with 100.

Similarly, an SMSF with one investment property will be highly exposed to a broad property market fall or a circumstance that impacts the value of their property.

All SMSFs, even those with a well-diversified portfolio, would do well to monitor their allocations to various asset classes on a regular basis.