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SMSF - diversification

Discussion in 'Legal Issues' started by thesuperman, 20th Mar, 2016.

  1. thesuperman

    thesuperman Well-Known Member

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    When investing your SMSF cash, how many different asset classes and percentage splits between those asset classes are necessary? Can you just keep a small portion held in cash in the bank and most of the funds used for share trading but the amount allocated to the shares being quite well diversified?

    Currently have cash, share trading and a managed fund but the managed fund is pathetic losing money while the share trading is making good profits. Thinking of closing down the managed fund and actually making those funds make money share trading instead of going backwards.
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    First thing to do would be to read the trust deed which contains the rules of the fund and then look at the fund's investment strategy.
     
  3. CU@THETOP

    CU@THETOP Well-Known Member

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    What's a diorama?
     
  4. Cadbury99

    Cadbury99 Well-Known Member

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    You can fairly much invest as you please within an SMSF, subject to what's in the trusts deed/ investment strategy and the SMSF laws. You can update the investment strategy whenever you like subject to the trust deed rules (and obviously what's permitted legally).
    Obviously I have no idea what the managed fund is invested in but I would caution that the reason for diversification is to reduce an SMSF's volitilty and therefore losses when certain investments go down in value. The idea is to invest in different types of assets that behave very differently as different events occur.
    If one was to invest all of one's money in Aussie shares and the Aussie share market takes a dive then expect big losses, but if a percentage was invested overseas then those markets might be going up and counterbalance the effect of the ASX losses. Probably even better to go across different asset classes not just markets.

    The following link explains the importance of diversification better than I can;
    The Importance Of Diversification | Investopedia


    None of the above is advice just my thoughts.
     
  5. TwoDogs

    TwoDogs Well-Known Member

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    When I first setup my SMSF I just used the asset mix that my previous fund was using. That was MLC growth, so my plan was to match the allocation of classes according to that fund. I didn't intend for that to be final plan, but it was good place to start. Using EFTs to get exposure to property, fixed income and international is easy to do and the Australian part is with STW.

    That was 4 years ago and and never did get to all those positions, but that's part of running a SMSF. Make your investment strategy and adjust if and when required.
     
    Cadbury99 likes this.
  6. Redwood

    Redwood Well-Known Member

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    Hi there -

    The Trust deed which should not be a 'online' deed contains the governing rules of the fund. Important that its up to date.

    The investment strategy which will be drafted when you set up the fund and will be 'regularly' review will contain the strategy of the fund. If you invest in the standard asset classes such as cash, shares, TD and managed funds, your investment strategy can state these classes as an investment to show 'diversification'. If you invest in property, the strategy will include residential or commercial and the allocation. Most just do 0-100% across all classes. IF you are investing in exotics or property, I would like to see more documentation to support this strategy and how it correlates to the sole purpose test in that your strategy is based on gaining income to support your retirement. Note - your strategy will need to include your consideration of insurance and therefore any investment strategy before 1 July 2013 - I generally ask for an update to include insurance.

    Yes, you can pretty much invest in anything, as long as your trust deed and investment strategy allows it. It is generally the investment strategy that covers the asset allocation. The trust deed is really important when investing in property, be sure that the deed is not pre-2010 as they will generally not contain the required provisions/powers to borrow. Also, watch out for pension funds.

    Hope that helps

    Cheers Ivan
     
  7. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Investments are either prohibited (ie loans to a member / relative) restricted (ie in house assets, art) or they are permitted provided the fund investment strategy allows for it. Generally the deed will contain a catch all clause such " and any investment the trustee determines". s52 requires an investment strategy and even if the deed doesnt impose that rule the SIS Act does. ..I agree with Ivan comment on pre-2010 deeds is quite correct and may be a issue.

    Liquidity and classes may factor into this as well as age of members and their needs. The joy of a SMSF is you design the strategy with or without guidance. A SMSF can choose a strategy with a sole asset class if they decide...Not always wise but may work for some. I had a client with $2m in term deposits with any one institution of $250K and nothing else. They had a 100% risk free strategy. Didnt earn much but it didnt lose money either. Its what worked for them (90's !!) and they needed access to liquidity based on their age/s.