Asset allocation skills required

One of the requirements of running your own self-managed super fund is a written investment plan. This can be as vague or as detailed as you wish but the more thought you put into it, the more successful your fund is likely to be.

The technical services manager for Multipot, Philip La Greca, says it is the responsibility of the fund's trustees to prepare an investment strategy document. The fund's auditor must ask if you have a strategy and it is up to him or her to report any breaches but there are no guidelines requiring that.

The auditor is also not required to judge whether your plan is appropriate for your needs and circumstances.

The professional standards director at SPAA (Self-Managed Super Fund Professionals' Association of Australia), Graeme Colley, says the Australian Tax Office (ATO) can penalise you if you lack an investment strategy but it usually gives you time to correct the omission.

At a bare minimum, La Greca says an investment strategy should include the risk you are willing to accept, the returns you are targeting and the likely impact on your cash flow, asset allocation and diversification, and the liquidity of those assets to meet your requirements.

INVESTMENT STRATEGY

"Most people focus on the first part and look at long-term objectives in terms of rates of return," he says. "Traditionally these have been motherhood statements about wanting sufficient assets and returns to live comfortably in retirement."

Ideally, you should quantify your fund's objectives in terms of real returns after inflation: for example, CPI plus 3 per cent a year. Risk is more difficult to quantify.

La Greca suggests you could start by thinking about the frequency of loss-making years you are willing to accept: for example, a loss in one year in five.

"It comes down to the sleep-at-night test and how much you are willing to risk," he says.

Trustees also need to take into account the different risk profiles of members. It might not be possible to run separate portfolios within the fund, so writing a plan can help you nut out the issue.

One of the benefits of having a DIY fund is the flexibility to invest in a broad range of assets, including direct property.

While there is nothing to stop you investing all your money in one asset or asset class, you need to show that you are aware of the risks involved in that and you understand the implications for liquidity and cash flow.

Investing most of your super in direct property might not cause a problem during the accumulation phase but once you retire, you need to make sure the rental income is sufficient to meet your living expenses.

It also becomes more important in the pension phase to have sufficient liquidity to meet potential liabilities such as death benefits. If one member dies and death benefits are to be paid to beneficiaries outside the fund, you need to consider which assets will be cashed out.

PENSION PHASE

There is no requirement to update your investment strategy when you retire and your fund moves into pension phase but it is desirable. You might also need to make changes if your fund accepts new members with different time horizons and risk profiles.

Contrary to popular belief, Colley says you don't have to put your strategy in writing.

"It was put to the Cooper inquiry [into the super system] that there should be a requirement to have an investment strategy in writing but it was not enforced," he says.

Colley says most self-managed super administration services ask clients for a copy of their investment plan and provide examples.

Clients of financial planners are also likely to have a written plan, because planners are legally required to provide a written statement of advice.

But even where you have a plan in writing, there is no requirement to meet your fund's objectives. At worst, La Greca says, you might get a "please explain" letter from the ATO.

The real incentive of a well-thought-out investment strategy is that you are more likely to reach your destination: a comfortable retirement.