Question of the Week

Cash versus equities and life insurance

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Question 1: I’m 60, in pension mode, and my SMSF’s share portfolio is mainly in blue chips similar to those in the Switzer portfolios and worth around $600,000 at current market levels. I have $400,000 cash in term deposits that mature in December this year. I’ve read that as a rule of thumb you should own 100 minus your age in equities and the balance in fixed interest investments and cash. I see my cash earning little, and despite already having exceeded the rule of thumb asset allocation, I’m tempted to top up my existing shares when the term deposits mature. What strategy would you recommend?

Answer (By Paul Rickard): I am always a little circumspect about “rules of thumb”. I am not particularly familiar with the one you quote – sounds like it may have been invented by someone to help sell a book.

One problem I have with it, specifically, is that it doesn’t take into account any dynamic asset allocation. The harder the share market runs, the stronger the argument is to start to reduce your exposure. Use the rule as a guide – but not much more.

For most people at your age, circa 60% in growth assets (Australian shares /international shares etc) is going to be around the mark. Whether it is right for you will depend on your risk appetite, how much income you need in retirement, other assets outside super etc.

Prima facie, I wouldn’t say that 40% in income assets is inappropriate. By December, if the equities market is higher still, I would be even more inclined to maintain the weighting.

If you are looking to increase your return and are prepared to take on some more risk, consider these options:

  1. Listed hybrid securities or other higher risk interest bearing assets (eg. mortgage funds).
  2. Property – direct, or through listed or unlisted property funds.
  3. Stay short in the term deposit market – when interest rates increase, extend the term to pick up yield; or
  4. In the equities market – stick to the less volatile sectors (consumer staples etc).

Hope this helps. My other suggestion? Perhaps you should consider a consultation with a financial advisor.

Question 2: I noticed in The Australian’s Business section an article emphasising the need for trustees of an SMSF to take out insurance or at least consider it. Our Minutes show that we did consider it but have not acted on it because we felt our Medical Benefits and Health cover met our needs. However, according to this article, we should take Life Insurance fairly seriously. I am 72 and my wife is 66. Can you please advise us and which funds you would recommend?

Answer (By Paul Rickard): I am not familiar with the article you refer to and I am a little bit puzzled by it.

You are required under the law to consider the insurance needs of the members. The regulation says: “whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.”

As you point out, you are not required to take out insurance – just conduct a review as to whether you need it or not.

Should you take out life insurance? I think at your ages, it really depends on the monies you have accumulated in super and the assets you have outside super, and whether they are going to be sufficient to meet your financial needs in retirement. If you have sufficient savings and don’t have any liabilities, why would you take out insurance?

If, on the other hand, your current savings may be inadequate or you have liabilities, then life insurance may make some sense.

As you are both over 65, taking out life insurance is not going to be straightforward and arranging cover may be dependent on completing medical examinations. I would initially contact three or four of the major life insurance companies to see if they will provide cover, ask for an indicative quote, and obtain a briefing on the process. Some life insurance companies that you might care to contact include AMP, CommInsure, OnePath and BT Life.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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