Everyone has their own reasons for wanting to start or join a self-managed superannuation fund (SMSF). However, two of the more common reasons are greater control and investment choice.
While these are valid reasons, it’s interesting to note that when you look across all SMSF assets of about $600 billion, cash and term deposits represent about 25 per cent of all assets.
This can be deceiving as it isn’t truly representative of all SMSFs, and it differs greatly across SMSF funds depending on their size. For SMSFs with less than $2 million of total assets, which represents about 85 per cent of all SMSFs, their average cash holdings are higher than this overall average, with the allocation to cash rising the smaller the SMSF size.
For an environment where investment choice is nearly limitless, this apparent over-allocation to cash could be seen as an overlooked area of opportunity.
Sure, there may be valid reasons for some investors to hold a higher allocation to cash, such as preparing for imminent retirement or awaiting a specific investment opportunity.
Regardless of your situation, here are five tips for making sure your SMSF is using its cash in the best way and working towards your retirement goal.
1. Choose the right cash account
It’s important to keep in mind that traditional cash accounts are at the mercy of the prevailing interest rate. It may be worth considering the use of multiple cash accounts. This way, one is your “transactional” cash account used to pay bills, pension payments etc. The other is your true “investment” cash account, which could be a term deposit or an online cash account that often pays higher levels of interest. Also these generally have greater flexibility for withdrawals, or transfers to your transaction account when needed.
2. Don’t forget to invest your cash after you contribute
Most of us have a tendency to do things at the last minute. It’s human nature because many of us have misconceptions about time. A great example of this is trustees who make additional contributions to super close to the end of the financial year. Sometimes in the rush to get money into super, one thing that is overlooked is how to then invest that money.
3. Consider why and how much really needs to be held in cash
If you are approaching or are already in retirement, a natural inclination may be to change your asset allocation to more conservative investments, such as cash and term deposits. This can give you a form of capital protection against market downturns.
But it’s important to remember that while savings held in cash are protected from downside fluctuations, they also miss out on market rises. If there is a desire to make your money work hard and as long as possible for you, it’s important to consider two things. First, what’s the right asset mix for you and, second, what level of market risk is worth it?
4. Do you have an auto investment option available?
If you are or have been a member of an industry or retail super fund, you have probably experienced a form of auto investment. This means that any new contributions are generally invested automatically for you in accordance with your overall investment profile. Does this happen in your SMSF?
The use of an investment platform to hold your SMSF assets may provide this opportunity for you, not only for any new contributions, but also for the distribution of any dividends or other returns received on existing investments.
The use of other generic investment strategies, such as dollar cost averaging, where you invest smaller amounts over time and can reduce the risk of miscalculated marketing timings, are also worth considering.
5. Draw up a budget for your SMSF
At some stage you’ve probably drawn up a budget for yourself, which at its simplest is about managing and tracking your cash flow. While your SMSF won’t have entertainment expenses etc, doing a budget and understanding what the SMSF is spending its money on can be a great way to determine how much needs to be kept in cash.
Some things are unavoidable, such as the need to pay pension payments to members. But the budget can help you identify exactly how much you are spending on other fund expenses, such as administration and transaction costs, and help to determine if you are getting value for what you spend.
Bryan Ashenden is head of financial literacy and advocacy at BT Financial Group. AFR Contributor