Did you know that diversification is a vital part of a self-managed super fund (SMSF)?
A lack of diversification can put your SMSF at risk if a significant investment fails.
Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. The rationale behind this technique is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security. The purpose of diversifying is to mitigate risk of losses, the theory being one asset class may perform inversely to another asset class, for example asset class 1 may be losing value at 20% of the overall fund assets whereas asset class two may be increasing value at 10% of the overall fund assets, resulting in a 10% overall loss.
The ATO recently announced it would be contacting 17,700 SMSF trustees who hold more than 90 per cent of their funds in an asset or single asset class, to ask them to review their investment strategy and document the reasons behind their decision.
If you have any concerns about your SMSF, or would like some assistance with these issues, give us a call on (08) 9791 5877.