Key takeaways
- A documented investment strategy is a legal requirement for every SMSF.
- It must consider risk, return, diversification, liquidity, and the fund's ability to pay liabilities.
- It must take account of members' circumstances and whether to hold insurance for members.
- The strategy must be reviewed regularly and whenever the fund's circumstances change.
The investment strategy is the document that ties your fund's investing to its purpose. It is not optional and it is not generic boilerplate. The law requires every SMSF to have one, to follow it, and to review it, and auditors check that it is real and current.
What the strategy must consider
Your strategy must address, in light of the fund's circumstances:
- Risk and return. The risk involved in the investments and the likely return, given the fund's objectives.
- Diversification. How the fund spreads risk across asset types. A fund heavily weighted to one asset, such as a single property, must explain why that is appropriate.
- Liquidity. Whether the fund can convert assets to cash to meet expenses and benefit payments when needed.
- Ability to pay liabilities. Whether the fund can meet its costs and, in pension phase, its pension payments.
- Members' circumstances. Ages, retirement timeframes and needs of the members.
- Insurance. Whether the fund should hold insurance cover for one or more members.
Why diversification gets attention
The ATO has paid particular attention to funds concentrated in a single asset class, especially property bought with borrowings. You are allowed to concentrate, but the strategy must show the trustees considered the risks and decided it suits the members. A one-line strategy that simply allows 0 to 100% in every asset class is unlikely to satisfy an auditor.
Review it, do not set and forget
The strategy must be reviewed regularly, at least annually, and whenever something significant changes: a new member, starting a pension, a large contribution, or buying a major asset. Record the review in minutes so there is evidence it happened. See record keeping.
Make it useful
The best strategies are written to actually guide decisions, not just to pass an audit. Used well, the strategy is where the trustees' thinking lives, and it keeps investing aligned with members' retirement goals rather than drifting with the market.
Frequently asked questions
- Is an SMSF investment strategy legally required?
- Yes. Every SMSF must have a documented investment strategy, must invest in line with it, and must review it regularly. Investing without a current strategy is a compliance breach.
- Can my SMSF invest mostly in one asset?
- It can, but the strategy must show the trustees considered the lack of diversification and the associated risks and decided it is appropriate for the members. Funds concentrated in a single asset attract more scrutiny.
- How often should I review the investment strategy?
- At least annually, and whenever the fund's circumstances change, such as a new member, starting a pension, or a major investment. Record each review in the fund's minutes.
