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SMSF strategic advice

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Question: I am 45 and have an SMSF of about $350,000. I usually transfer $50,000 every year. My investments are via a buy and hold strategy with $20,000 every year going to big bank shares and $15,000 each in vanguard shares index and $15,000 in term deposits.

Do you thing it is a good strategy looking long term?

Answer (by Paul Rickard): While it’s a pretty simple strategy, it is a good starting point. At 45, you need to think about your super being in place and lasting another 45 to 50 years – so this implies exposure to long-term growth assets. Also, to build your super so that you can enjoy a comfortable retirement, it requires regular and ongoing contributions – which you are doing.

Of the $50,000 going in each year, 70% is going into growth assets (Australian equities), and 30% into income based assets (30%). Presumably, you are re-investing the dividend income – so your SMSF has a reasonably strong growth bias.

The selection of major bank shares and the Vanguard Shares Index is giving you are a bias towards almost ‘annuity’ style shares in the major banks, paying fully franked dividends, plus some exposure to the overall market through the Vanguard Index fund. The latter is pretty cost effective.

What are the main risks in what you are doing?

  1. You are not covering all the major asset classes. You don’t have any real exposure to international shares, and you are underrepresented in property.
  2. You are “overweight” bank shares. While the major bank shares (excepting the NAB) have done fabulously well over the last two decades, I am not convinced that this is going to be the case over the next two decades. Post the GFC, we are in an era of “re-regulation” which means that banks will need to hold more capital for prudential and regulatory reasons. Longer term, bank ROEs are likely to fall.
  3. You potentially have a reduced exposure to other sectors/stocks that may grow over the next decades – for example, healthcare.

I like the simplicity of your strategy, your regular contributions and “buy and hold approach”. I would give it a 6 or 7 out of 10.

Could it be a little more sophisticated?

Probably. Here are some suggestions:

  1. Start to get some exposure to international shares. Perhaps through an ETF;
  2. With your direct shares – either start to diversify into some other sectors/stocks (reduce the ongoing contribution into the major banks), or increase your ongoing contribution to the “market” through Vanguard or other equivalent fund/ETF;
  3. On the fixed interest /term deposit side – in addition to term deposits, also consider some other securities/investments to boost the running yield; and
  4. At some stage, look at property as an asset. An allocation here (or not) will also be impacted by what other assets you hold outside superannuation.

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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