Investment diversification and the right exposure don’t stop at retirement: adviser
SMSFs need to ensure they have exposure to different asset classes in the right areas even if they are approaching retirement, says a leading accountant and specialist adviser.
In the latest Business Concepts Group podcast, Chris Reed, director of BCG, said members and trustees need to fully understand what their fund’s asset allocation and risk profile looks like.
“For SMSFs, it means looking at diversification, making sure the fund has exposure to different asset classes in the right areas that the members are comfortable with, and keeping a view on the long term,” he said.
“Even if you're approaching retirement, or maybe you're already retired, it’s still about looking at that long-term time frame.”
Mr Reed said with the average life expectancy now in the late 80s investments need to perform for decades longer than when people generally retire at 65.
“With SMSFs, there is a need to balance that with things like liquidity and cash flow,” he said.
For example, he said, SMSFs can face liquidity problems if they have a lot of assets tied up in property, especially if those properties are not generating enough income to meet minimum pension requirements.
“We've also had clients pass away who have properties, and there is not enough cash and other assets in the property to pay the death benefit,” he said.
“We have to work through strategies on how the fund is going to be able to meet its obligations.
“The message is to look at the asset allocation of your SMSF and make sure that you've got the right investment mix to suit your circumstances.”
He continued that the fund’s investment strategy should also be reviewed on a yearly basis.
“It’s important to make sure that wherever you are investing, it's still in line with your investment strategy ... I think it's a good idea to try and keep it within your risk profile,” he said.
“Over time, you might start out as a growth investor and it might end up that you're in a high growth space just because of the value of the investments.
“But you want to have a look at that each year and make sure you're still comfortable with that risk profile.”
If an SMSF is investing in managed funds, he said it’s best practice to look at what the assets are within that managed fund.
“We have seen funds that have promoted themselves as being balanced and are really pretty aggressive,” he said.
“It's really a matter of understanding what assets are being held within those managed fund options that you might take.”
