Checklist for investing in your SMSF

The start of a new financial year is a great time to review your SMSF investment strategy.

Here's a look at several investing actions to take with your SMSF.

Updated 21 June 2016

By Paul Rickard

1. Review your investment strategy

You should review your SMSF’s investment strategy whenever the circumstances of your members change and periodically to make sure it is up-to-date and meeting your objectives. The transition from one financial year to the next is a good trigger point in this regard.

As part of any review, also consider the insurance needs of your members (life, TPD, etc). While you are not required to take out insurance, the SIS (Superannuation Industry Supervision) Act requires that trustees regularly review whether their fund holds insurance cover for the members.

2. Check and confirm your asset allocation

Working top down first, let’s start with your fund’s overall asset allocation. While you are not necessarily going to manage the allocation dynamically, it is also not meant to be static. If the circumstances of one of the members changes, or the investment objectives change, or your preparedness to accept risk changes, then your asset allocation will probably need to change.

Also, as your views on markets change and asset classes perform relative to each other, you may wish to review your allocation. As the weighting is based on the market value of each asset class, the chances are that your allocation at the end of the year will be somewhat different to how you started the year.

3. For stocks, check your sector allocation

Continuing the “top down” approach in relation to your share portfolio, is the balance across the sectors right?

The S&P/ASX 200 is divided into 11 industry sectors, which have different weights according to the market capitalisation of the stocks that make up that sector. Over the course of the year, the weightings change as companies join or leave the index, others raise capital, and due to changes in the share price, the market value of each company changes.

Depending on your SMSF’s investment objectives, you will probably target biases in some sectors where you will be overweight relative to the index, and in other sectors, underweight. For example, if your main priority is growth, you may wish to be overweight in sectors such as consumer discretionary, industrials and healthcare, and potentially underweight in some of the defensive sectors such as utilities and property trusts or AREITs.

If the actual sector bias in your fund is different to how you intend it to be (your target position), then depending on the materiality, you may want to take action to address it.

4. Throw out the dogs

Next in relation to your share portfolio, do you have any dogs? The hardest part of investing is to acknowledge a mistake and cut a position. There is an old adage that goes “your first loss is your best loss”, and in my experience, this proves right (in hindsight) at least eight out of 10 times.

In thinking about this, you will also take into account your sector positions and mismatches away from your target position. The other factor that may influence your decision is whether you can utilise any capital loss.

5. Capital gains tax to pay? Can you offset with losses?

If your fund is in accumulation mode, then you are still liable for capital gains tax. While the nominal tax rate is only 15 per cent, it is further reduced to 10 per cent of the gain if the asset has been held for more than 12 months (super funds get a one-third discount).

Importantly, you can offset capital gains with capital losses, and losses that cannot be used can be carried forward to the next tax year.

So, if you have taken capital gains during the year, then you may want to consider any assets in a loss situation and review whether you should continue to hold them. Of course, tax should never be the primary driver for an investment decision.

And just because you haven’t set out to sell shares on the ASX doesn’t mean you haven’t taken any gains. Takeovers are a disposal for CGT purposes – in 2014/15, a number of high-profile companies were taken over, including David Jones and Toll Holdings. Also, you may have taken part in the Medibank IPO and then sold the shares.

Read next: The risky business of using an SMSF and borrowed money to buy property


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