Diversification: put your eggs in more than one basket!
One of the most exciting things about setting up an SMSF is investing. As a trustee, you have near complete control of how your superannuation money is invested when you create your SMSF investment strategy.
Many finance gurus will tell you to ‘diversify your portfolio’. But what exactly does that mean? If you’re new to investing and SMSFs, it can be a little daunting – but don’t worry, we’re here to help you brush up on your finance lingo and learn why diversification matters.
What is diversification?
We’ve all heard the saying: ‘don’t put all your eggs in one basket’. This is true for the money you invest, too.
Diversification in investing helps you navigate risk by spreading your money out across different assets. It’s a concept that you might have heard of before but when it comes to investing for your SMSF, it’s a big deal.
How does SMSF investing work?
Typically, an SMSF pools all the money of its members (if there is more than one) and – using the SMSF’s investment strategy – invests on behalf of all the members.
For example, if you and your partner set up an SMSF and the fund buys both Telstra and BHP shares, they belong to the fund, not you or your partner. The fund carries a total value (in Australian Dollars) and its members (in this case, you and your partner) have an account balance within the SMSF.
This is very similar to how it works in a large superannuation fund, where if you have an account balance in the fund, you don’t own any particular asset held by the superannuation fund. If you’re new to SMSFs, take a look at our beginner’s guide to the SMSF investment strategy to learn more.
So, why is diversification important for an SMSF?
It can be risky to invest all or a large portion of an SMSF’s money into one asset or one asset type. The reason it’s so risky is that if that one asset doesn’t do so well, neither will your fund!
Historically, most SMSFs have invested in Australian assets only, so when the Australian market doesn’t do well, SMSFs tend to follow suit. This is one of the main reasons why it’s important to diversify your fund: if one of your assets isn’t performing as well as the others, chances are your fund won’t suffer as much as if you had all your money tied up in one place.
Is there a way to invest in international assets?
Absolutely – with Exchange Traded Funds (ETFs). It’s a share or unit that represents your investment in a large diversified fund. Depending on the specific ETF, they carry a broad range of assets – everything from Australian and International shares, to precious metals. Typically, ETFs are held as a passive investment.
ETFs usually carry lower fees and can be bought and sold on a securities and exchange market. However, while fees might be lower, ETFs can attract higher management costs and you’ll have to pay brokerage fees to buy and sell. What makes ETFs different is that they usually go up or down according to the index they’re tracking (generally without trying to outperform the market).
ETFs are growing in popularity as an option for SMSFs, but as with any investment, it’s important to get the advice of a licensed financial adviser before you go ahead and invest.
Interested in keeping tabs on your SMSF investments?
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