SMSF strategies for the start of the new financial year

Peter Switzer: Hello, and welcome to Switzer Investing Insights brought to you by Nabtrade. It is the start of a new financial year, so let’s review the strategies that will help keep your portfolio in good shape.  

Paul Rickard: Let’s start with activities specific to running your SMSF. Firstly, it is a good time to review your investment strategy which you are required to do on a periodic basis. Make sure it is fit for purpose and reflects how you and the other members want to invest and manage your investment risk – and takes into account any changed circumstances of the members or their investment  needs. This includes reviewing their insurance needs.

Peter Switzer: What about the super caps?

There are no changes to the super caps  - $25,000 for concessional contributions which includes the employer’s 9.5% and any salary sacrifice contributions – and $100,000 for non-concessional contributions – but the important point here is if you are eligible to make contributions, do some planning now and don’t leave it to the end of the  year.

And if you want to split the concessional contributions made last financial year with your spouse – in other words, to boost your spouse’s super – you should formally advise your SMSF   before you lodge your tax return

Peter Switzer: Lets move on the investment portfolio. What should we do?

Paul Rickard: Start with the asset allocation, because the investment research says this is the major driver of risk adjusted investment performance. It is important to remember that asset allocations are not static because as markets change, the value of individual investments rise and fall – meaning that the amount invested in each asset class changes. We also make new investments and sell others during the year, so periodically, we should re-balance our portfolio to make sure that our exposures are what we want.

Of course, there is no right or wrong asset allocation. What is right for you depends on your own investment objectives, your need to grow capital or preserve capital, your need for income, your tolerance or enthusiasm for risk and many other factors.

Some target allocations, using generic risk descriptions, are shown on the screen below. As you move from left to right, the proportion of income assets – things like cash and fixed income – reduces from 100% down to 1%, and the proportion of growth assets – those that are expected to provide most of their return from an increase in price – assets such as shares or property - increase from 0% to 100%. For example, a balanced investor with a 40/60 split between income and growth assets.

Source: Switzer Report

Peter Switzer: Okay, so that’s re-balancing to make sure your overall asset exposure is where you want it to be, what about the actual assets themselves?.

Paul Rickard: Yeah, that’s the next step – particularly for diverse assets like company shares – to ensure  that the exposures to different industries and the drivers that will take the economy forward  – are  where you want them to be. We call this our sector allocation.

Each company is categorised using a global scheme that breaks the market up into 11 sectors. These are shown on the screen, together with their respective weight, and some of the largest stocks in those sectors.

As at 31 May 2019. Source: S&P Dow Jones

For example, the Financials Sector makes up 32.0% of the S&P/ASX 200. If you have a view that this sector has strong prospects, then you will want your portfolio to be overweight this sector – that is, the weighting of the individual stocks would sum to more than 32%. Conversely, if you don’t favour the sector, then you will want to be underweight.

Peter Switzer: So, this is about making sure you have the right biases – potentially overweight in some sectors and underweight in others. What about the actual stocks?

Paul Rickard: That’s the last step – to check the actual stocks. And the chances are that there will be some underperformers with poor prospects – so it’s time to do a clean up and throw out the dogs and perhaps add some others.

Peter Switzer: Harder said than done?

Paul Rickard: Yes, it is hard, but it is a good discipline and the start of the financial year is as good a time as any.

Peter Switzer: Rebalance your portfolio, check your sector biases, throw out any dogs, and make sure that you are getting the best out of the super system – these are all strategies to make sure that you start  the financial year in good shape. Thanks for joining us on Switzer Investing Insights, brought to you by nabtrade.

END OF VIDEO.