Speaking to SMSF Adviser, AMP Capital’s head of SMSF, Tim Keegan, said while SMSFs have understandably focused on cash and term deposits as a proxy for fixed income, the cash rate is now the lowest it has been in 50 years.
“Clearly SMSFs, particularly those heading into the pension phase, should be looking for an alternative to cash and term deposits to generate better yield,” he said.
The current exposure of SMSFs to bonds is limited, Mr Keegan said, with the ATO statistics for December showing only $5.1 billion or 0.93 per cent of the $533.7 billion assets held in SMSFs invested in debt securities.
The ATO statistics show cash and term deposits on the other hand account for $156.7 billion or 28.3 per cent of all assets.
Mr Keegan said bonds are negatively correlated with equities so in the event of market volatility or a downturn, bonds will typically operate in the opposite direction to equites.
“We all know that markets run in cycles and that in order to protect against downside risk in an equity market correction it’s critically important to have bonds in a portfolio,” said Mr Keegan.
If SMSF trustees hold a combination of equities and bonds, they will be “substantially de-risking their SMSF”, he added.
“For SMSFs heading into retirement, the last thing they want is a sequencing event, a GFC-like event where the value of their assets going into retirement are significantly reduced, so the role of fixed income is incredibly important,” Mr Keegan said.
Silly position to take – advise them to go into bonds now, when potentially if/when interest rates rise in next couple of years there can be potential for capital losses???
Love to hear these theorists espouse what people should do, and yet never once have they had to actually be personally responsible for individual advice. Walk a mile in an adviser’s shoes and you may look at the world with a more concerned and sharper outlook.