Building a Resilient SMSF Share Portfolio

An SMSF share portfolio gives you complete control over your investments. With these, you are a member and the trustee, unlike most investment vehicles, where the trustee is a third-party financial management firm.

Managing SMSFs can be challenging. Much like other private super funds, things can get complicated, but not impossible.

In this article, we explore how to strengthen your SMSF share portfolio, determine the optimal asset allocation, and implement proper management.

Understanding SMSFs

An SMSF portfolio (Self-Managed Superannuation Fund) isn't the same as conventional retail or industry super funds. The key advantage of this approach is that it gives you hands-on control over your investment choices. You decide where you put your money, whether that's property, shares, gold, or other assets. The only requirement is that the fund meets the "sole purpose test," meaning it is intended solely for your retirement and not for any other purpose.

Benefits of an SMSF Share Portfolio

The benefits of an SMSF share portfolio depend on your investment preferences.

• Higher returns: You may find that managing your SMSF share portfolio yourself yields higher returns. While rare, you might have a strategy you want to implement that beats the market.
• Tax efficiency: SMSFs also benefit from superior tax rates (either 15%, 10%, 0% or 45% for non-compliance). Building wealth in these investment vehicles is cheaper than in a standard share-dealing account.
• Diversification: You can buy, sell or hold instruments from any asset class provided they qualify, giving you more control and reducing market risk if done well.

Types of SMSF Portfolios

Your SMSF portfolio construction should be tailored to your goals.

Defensive

Defensive portfolios focus more on capital preservation. Usually, you'd use one of these if you were closer to retirement. You'd expect to have safer assets, such as government bonds and property, and less risky ones. You may also want to skew your portfolio toward blue-chip companies that are unlikely to experience sudden declines in value.

Balanced

Balanced SMSF portfolio management tries to match risk to reward. Ideally, you'd choose one of these portfolios when you are further from retirement (say, five years or more). These typically comprise a mix of growth and value stocks, along with fixed-income securities. You can also use them to invest in property.

Growth

Finally, growth SMSFs are all about earning the highest expected returns. Volatility is greatest in the short term due to the focus on growth stocks and alternative investments; however, overall earnings over a decade or more are expected to be higher.

Strengthening Your SMSF Investment Portfolio

Because you have full control over your SMSF investment portfolio, you can tailor it to your preferences. You don't have to rely on a trustee to do it for you.

Investment Goals

The best place to start is with your investment goals. What do you want your SMSF for? For example, are you close to retirement and want to preserve your capital? Or are you looking for longer-term investments and can take greater risks?

Diversification

Diversification is another way to strengthen your portfolio. Buying multiple companies, the stock index, or uncorrelated asset classes reduces the risk of large losses during downturns.

Quality Investments

As you approach retirement, consider the quality of your investments. Speculative ventures or volatile cryptocurrencies can often be unpredictable and may not always be the most reliable options.

Sustainable Investing

You might want to strengthen your SMSF with sustainable investing. Investing in green ETFs or companies that operate sustainably can provide the legacy you desire.

Asset Allocation

The allocation of SMSF assets can vary based on individual risk preferences. For those who prefer a riskier approach, a portfolio might include around 70% shares, 20% property, and 10% government or corporate bonds. Alternatively, for those leaning towards lower risk, a portfolio could consist of about 35% shares, 55% bonds, and 10% in gold or cash equivalents.

SMSF Portfolio Management

Determining how to manage your SMSF share portfolio is crucial for achieving long-term success.

Monitor

Start by monitoring your fund properly, checking it against national indices, such as the ASX 200, and global benchmarks, like the S&P 500.

Review

Additionally, consider why your portfolio returns might be lagging or outperforming global benchmarks. If you notice a problem, consider changing the balance of funds annually or biannually.

Seek Professional Recommendations

Usually, you won't know why your portfolio is under- or outperforming the market. Therefore, always seek professional advice. Experts can sometimes provide guidance on how to generate higher returns.

Legacy Planning

Consider who will become the new beneficiaries and how you'll bring it under your estate plan. Working with accountants and going through the tax implications for your heirs can be helpful at any stage.

FAQs

What is the 5% rule?

The 5% rule measures the value of the in-house assets in the fund at the end of each year. If you exceed the 5% limit on in-house assets, you must prepare a rectification plan detailing how you will rectify the issue. If you don't, you could face penalties, including a higher tax rate.

Can I sell SMSF shares to myself?

SMSF rules allow you to sell assets or transfer them from your SMSF to yourself under special rules and conditions. You can only release equity in existing SMSF properties by selling them.

Do you pay CGT on shares in an SMSF?

Whether you pay CGT on an SMSF share portfolio depends on the phase of the investment. You pay a concessional CGT rate of 15% on SMSFs, provided you comply with the laws and rules for the funds. Otherwise, you pay 45% on non-arm's-length income (NALI). You can pay 0% (tax exemption) on income received from assets to support retirement phase income.

EC Pohl & Co are a funds management firm specialising in individually managed share portfolios for sophisticated investors. We focus on sustainable, quality growth companies listed on the ASX, using in-depth research and a long-term investment approach.