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Strategies for success

By SMSF Adviser
15 August 2014 — 3 minute read

Verante Financial Planning director Liam Shorte speaks to Katarina Taurian about the strategies SMSF trustees and their advisers should be looking to in the current low-interest rate environment.

How do you think, generally speaking, SMSF portfolios are performing?

They’ve been doing well for the last few years, because term deposit rates were decent. Now in the last year people’s [investments have stalled] because they are holding such a big amount in cash. People in the last 12-18 months have at least been willing to explore other areas, not just Aussie shares and cash. They’ve been looking a lot more at bonds and international shares. International shares in particular have paid off very well.

It’s very much a case of taking it slowly, slowly with people. With SMSFs especially you have to do things they’re comfortable with. You have to be transparent, you have to make sure that they really understand what they’re getting into.

What should trustees be wary of with their investments at a time like this when interest rates are so low?

Well one thing that trustees need to realise is that things will change, rates won’t stay this low forever. If they’re going to move from cash to something else as an investment, they really need to understand the risks involved, and realise what they’re getting themselves into.

They need to be a bit more careful about where they’re putting it when it comes to stocks in particular.

Is there anything you feel that SMSF trustees should be doing more of when they’re constructing their portfolio?

I really strongly believe in the bucket strategy. So for every client that we have going into pension phase, because they’ve been used to having a regular salary monthly, we try to replicate that in retirement. What we try to do is keep six to 12 months' pension in cash and short-term term deposits, and then the next two to three years' pensions are kept in fixed interest and are 100 per cent secure, so that if the market does have a GFC-like event again, or even a minor short-term fall-back, people know they don’t have to sell anything. They’ve got a few years’ pension sitting in cash that can be maintained without having to sell growth assets.

That gives people a lot more comfort in taking a little bit more of a risk, to look at shares and property, and basically the longer-term view, knowing that if anything happens in the short-term they won’t have to sell because they’ll have this regular pension coming through.

It’s very much a psychological comfort zone for people.

And one of the things I’ve been telling people to do is a check of their own family situation. A ‘what if’ scenario. What if the son or daughter arrives back on your doorstep with two kids after a marriage breakdown, for example. What I’m seeing is a lot of pressure on retirees to come up with money for their families. Be it to keep their kids out of trouble for a while or to help out after a divorce. They might even need to become parents again to their grandchildren. And that’s taking a big hit on their retirement savings. So I’m just saying to clients to make sure they know what they would do in several different situations.

Also, one of the things that people have always said is if you get into trouble you can downsize, and unfortunately that’s becoming more and more of a strategy that’s just not going to work. Most of the areas people want to live in cost just as much for a single-level as it is does for a two-storey house, because you’re competing with developers.

So I haven’t seen anybody come out of a home downsizing with more than $50,000 or $60,000 after all costs have been incurred. And most of them were expecting to clear at least $200,000. This is because they really want to stay in the same area because of family and friends, around familiar areas. The thing is if you stay in the same area, you have to make a radical change in the size of your home to get that sort of difference.

So it’s important to clear up those myths about how you would get out of trouble if you ran out of money.

Read more from Liam Shorte in the upcoming September edition of SMSF Adviser magazine.


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