When forming a fund’s investment strategy, diversification is a notable consideration for SMSF trustees. By spreading the investments of a fund across different asset classes and markets that offer varying risks and returns, SMSF members can better position themselves for a secure retirement.
The intention of diversification is to spread the investment risk of an SMSF. The idea is that if one asset underperforms, it can be offset by the success of other assets and keep the fund on track to meet its investment objectives. Diversifying investments across uncorrelated assets, such as shares and bonds, may also make it possible for investors to lower the volatility of the portfolio.
How to diversify your fund:
Accessing certain asset classes can be challenging for SMSFs due to minimum investment requirements or other ownership restrictions. Managed funds and exchange-traded funds (ETFs) are two options that can provide easy access to diversification. Managed funds pool together money from multiple investors which professional managers then invest in a variety of assets, such as global or local shares, offshore property or high-yield investments. ETFs, on the other hand, aim to replicate the performance of a particular index or group of assets, which can give an investor exposure to an entirely different market or asset class. These two methods can give SMSFs the ability to access more diverse investments.
Consider the benefits of listed investment companies and other digital investment platforms that further allow low-cost access to different markets when looking into other ways to diversify an investment portfolio
Trustees should always document their actions and decisions made, as well as their reasons for doing so. A record kept of these details will demonstrate that they have satisfied their obligations as a fund trustee.
As having an appropriately diversified portfolio can have a significant impact on members’ retirement savings, trustees may consider seeking professional financial advice in the management of their SMSF’s investment strategies.