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The importance of diversification in an SMSF

Self-managed super funds (SMSFs) that are not well diversified are quite risky investments since they aren’t as protected as they could be against shocks and volatility in the market.

Diversification aims to maximise an individual’s return by investing in different asset classes that react differently to the same event. Although it does not guarantee avoiding a loss, diversification is an important component of reaching long-term financial goals while minimising risk.

Diversification can control a super fund’s risk, as the better performing asset classes will help offset the others that aren’t performing very well. It also provides the super fund with the opportunity for long-term growth, as the portfolio is exposed to asset classes with strong growth potential.

SMSF trustees that don’t have the appropriate blend of different asset classes in their fund risk their portfolio experiencing increased and unnecessary volatility. Well-diversified SMSFs include all the major asset classes including cash, fixed interest, shares and property.

The first step to ensuring an SMSF is properly diversified is to consider the exposures the fund currently has to the major asset classes and assess how diversified the fund is. Trustees must then engage in the process of working out which asset classes the fund requires to be properly diversified.

For many SMSFs, the idea is looking to invest in other asset classes that could help improve the fund’s diversification. These may include assets that have a negative or low correlation with one another.

Those concerned about the diversification of their fund need to review their fund according to their investment strategy to assess whether it makes sense to increase diversification. However, it is important to work out any capital gains tax consequences before selling down any assets to buy investments to improve a fund’s diversification.

Posted on 24 August '16 by , under Super.

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What to consider when consolidating your super

The ATO reported that 45% of working Australians were not aware that they had multiple super accounts in 2016. Having multiple super accounts is particularly common for individuals who have had more than one job. If this is you, it is important to identify and manage your super accounts because having more than one can be costly as a result of account fees from multiple funds.To combat this, you may want to consolidate your super, which moves all your super into one account. Not only does this save on fees, but it also makes your super easier to manage and keep track of.

Before consolidating your super, it is important to do the following:

Research your funds' policy
Compare your active super accounts so you can make the right choice about which one you should close. Things to assess include:

  • Exit fees
  • Insurance policies
  • Investment options
  • Ongoing service fees
  • Performance of the funds

Check employer contributions
Changing funds may affect how much your employer contributes, as some employers contribute more to certain funds. Check your current accounts to see if changing funds will affect this. Once you have selected a super fund, regardless of whether you choose a new super fund or one of your existing ones, provide your employer with the details they need to pay super into your selected account.

Gather the relevant information
When consolidating your super, you will need to have the following details ready:

  • Your tax file number.
  • Proof of identity. This could include your driver's license, birth certificate or passport.
  • Your fund's superannuation product identification number (SPIN).
  • Your fund's unique superannuation identifier (USI).
  • Details of your previous fund.

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