Key rules to obey when preparing and reviewing your SMSF investment strategy

The super laws require SMSF trustees to prepare and implement an investment strategy, a critical roadmap for achieving financial objectives and retirement goals.

What is an investment strategy?

The investment strategy sets out your SMSF’s investment objectives and retirement goals, and documents your plan for buying, holding and selling assets in accordance with those goals and objectives. It should also set out why and how you’ve chosen to invest your retirement benefits in order to meet these goals.
There are five specific factors the strategy must consider, which your SMSF auditor will review as part of the annual compliance audit.

These are:

• Risk
• Composition
• Liquidity
• Ability to pay benefits
• Where to hold insurance

While the SIS law does not specify that the investment strategy should be in writing, the ATO guidelines recommend that it should be. The super laws do require SMSF trustees to prepare and implement an investment strategy, and you should be reviewing it regularly, particularly when acquiring new asset classes.

Risk

The investment strategy needs to consider the risks involved in making, holding and realising, and the likely return from your fund’s investments regarding its objectives and cash flow requirements.

Composition

It also needs to consider and discuss the composition of your fund’s investments including the extent to which they are diverse (e.g. investing in a range of assets and asset classes) and the risks of inadequate diversification.

Liquidity

It also needs to consider and discuss the composition of your fund’s investments including the extent to which they are diverse (e.g. investing in a range of assets and asset classes) and the risks of inadequate diversification.

Ability to pay benefits

The investment strategy needs to consider the fund’s ability to pay benefits (such as when
members retire and require a lump sum payment or regular pension payments) and other costs it incurs.

Where to hold insurance

And finally, the strategy should consider whether it is appropriate to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member of your SMSF.

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