How to Write an SMSF Investment Strategy
All SMSF’s are legally required to have a written investment strategy which is a plan to assist the SMSF trustee in selecting, holding and selling fund assets to meet the trustees’ objectives and the retirement goals of the members.
An SMSF investment strategy involves evaluations asset selection, risk and return. The trustee/s has a prudential obligation to ensure the investments are made for the sole purpose of providing retirement benefits to the members or their dependants on their death.
The Superannuation Industry (Supervision) Regulations 1994 Reg 4.09 sets out what should be included in an investment strategy and includes consideration of the following:
- risk and return on investments
- diversification of the fund’s portfolio
- liquidity of the investments, especially how cash flow relates to each member i.e. pension members vs accumulation members
- the ability of the fund to discharge its existing and prospective liabilities
- insurance requirements for the members i.e. should the trustee take out a life insurance policy on behalf of the member or does the member have sufficient cover outside of super
An investment strategy should demonstrate:
- What type of investor is the trustee?
- What is the investment objective
- What is the investment strategy?
The ATO has some great information on your website about creating an investment strategy as well:
What type of investor is the trustee?
Trustees generally fit into three different types being the:
- Conservative Investor
- Balanced Investor
- High Growth Investor
A conservative investor seeks stability and low risk, favouring modest, steady returns over volatile or high-risk assets like crypto. This profile often fits older couples with most of their wealth in an SMSF.
A balanced investor is typically still building their SMSF, with retirement in mind but not imminent. They accept some risk, knowing markets fluctuate, and expect long-term growth will yield higher returns.
A high growth investor, typically younger and far from retirement, accepts higher risk and portfolio volatility in exchange for the potential of greater long-term returns.
What is the investment objective?
An investment objective may focus on achieving returns above inflation, depending on the investor type.
- Conservative investor – the expected return is 1% over the inflation rate over 3 years
- Balance investor – the expected return is 2% over the inflation rate over 3 years
- High Growth investor – the expected return is 5% over the inflation rate over 3 years
Example – Conservative investor
Joe’s SMS trustee expected a return of 1% over inflation over 3 years.
- Year 1 – 2022 annual inflation rate was 6.1%
- Year 2 – 2023 annual inflation rate was 6.0%
- Year 3 – 2024 annual inflation rate was 3.8%
The average inflation rate over 3 years is 5.3%. As the expected return is 1% over the 3 years the expected return for 2024/25 year is 6.3%.
What is the investment strategy?
The investment strategy contains the investment classes an SMSF wants to invest in which include (as examples, every investment is different):
Growth investments
- Australian shares
- International shares
- Property
- Cryptocurrency
Defensive Assets
- Australian Fixed interest
- International Fixed interest
- Cash
Generally, a conservative investor will have a higher percentage of assets in defensive classes and lower percentage of assets in growth assets. Conversely, the high growth investor has a higher percentage of assets in growth assets and only keep minimal cash and fixed interest asset classes. The balanced investor will include asset classes which are spread between all asset classes, a mix between conservative and high growth.
It is not a requirement to include a percentage range for each investment class, but it does provide transparency and makes it easier to measure whether the investment is within the investment range and whether the investment range is suitable for the SMSF investor.
Example – SMSF investing as a balanced investor
| Asset Class | Asset range | Actual % |
| Australian shares | 25%-30% | 28% |
| International shares | 5%-15% | 12% |
| Property | 10%-25% | 25% |
| Australian fixed interest | 15%-25% | 16% |
| International fixed interest | 0%-10% | 1% |
| Cash | 10%-20% | 18% |
An SMSF trustee may decide it is reasonable to have a high percentage of the fund’s assets in one asset class such as property with a small amount of cash which can be acceptable provided the trustee includes the reasoning in the SMSF investment strategy.
Example – SMSF owning one commercial property and cash
The SMSF invests 85%-95% in property and 5%-15% in cash. The property is not mortgaged. It is used in the members’ medical practice in Hunter Street Newcastle. The tenant is long-term and pays for all outgoings. Rent is paid at market value on a monthly basis. Rent is paid on time. The members of the SMSF are both under 40 and contribute the maximum concessional and non-concessional contributions allowable. The market value of the property is expected to continue to increase over a period of 25 to 30 years as the property will be sold when both members retire and pensions will start to be paid. There are no liquidity concerns as no pensions are payable in the short to medium term and administration costs of running the SMSF are less than the rent received. Additional cash will be invested into fixed interest and the share market to diversify the fund’s portfolio over the medium term.
How do you write an SMSF investment strategy?
The investment strategy is a formal written and properly executed plan which is tailored to your SMSF’s circumstances. It should consider the members ages, employment and their retirement plan as well as consider the SISA requirements discussed at the beginning of this article.
There is no specific format. Many businesses provide templates to prepare an SMSF investment strategy. A template is used as a guide only which must be completed by the SMSF trustee. The trustee may obtain the assistance of a licensed financial planner in selecting appropriate investments and preparation of the investment strategy.
At SMSF Australia we provide a template as part of our SMSF Setup services which can be used to assist you in formulating an investment strategy for your SMSF.
An investment strategy must be reviewed and amended, if required, at least annually and more often when there is a shift in the strategy or the fund acquires an unusual or non-standard assets such as collectables, crypto investments or an asset class making up a high percentage of the fund’s asset allocation in the fund’s investment strategy with an explanation as to why the asset meets the trustee’s objective.
A trustee minute should record the fund’s investment strategy review and confirm if any changes are needed.