Risk profiles and asset allocation

Everything SMSF trustees should know about investing.

What follows are the five main investor risk profiles that can apply to superannuation fund members. Over the life of a super fund all five risk profiles could be applicable depending on the age of the member, how much is being contributed, and whether they are in accumulation phase or pension phase. The percentage allocated to each class is a very personal decision. The percentages shown are what I regard as prudent but your allocation could differ dramatically.

In the investment profiles below the allocations to property is not listed property trusts but to direct property or direct property trusts. Some advisors in the financial services sector have classed a person's home and holiday homes as a property investment. Both of these are lifestyle investments and should not be taken into consideration when putting together an investment portfolio.

Conservative investor

This profile is applicable to a much older member that has been in pension phase for some time and wants to protect their capital at all costs. They have a short term investment horizon of no more than three years and are focused on income and not capital growth.

Asset Class

Target Allocation

Upper and Lower Ranges

Australian Equities

5%

0% - 10%

International Equities

0%

0% 

Property

5%

0% - 10%

Australian Fixed Interest

55%

30% - 70%

Cash

35%

10% - 40%

Alternatives

0%

0%

TOTAL

100%

 

Moderately conservative investor

this profile is applicable to a member in pension phase that still needs to have some growth assets to protect them against the impact of inflation. This member would have an investment time horizon of three to five years.

Asset Class

Target Allocation

Upper and Lower Ranges

Australian Equities

20%

10% - 30%

International Equities

5%

0% - 10%

Property

20%

10% - 30%

Australian Fixed Interest

45%

25% - 55%

Cash

10%

3% - 20%

Alternatives

0%

0%

TOTAL

100%

 

Balanced risk profile

This profile can suit a member of any age, in either accumulation phase or pension phase, or a combination of both. It would not be suitable where the member is totally risk averse. It provides a good balance between income producing investments and investments held for growth. The time horizon for this member is between five years to 50 years.

Asset Class

Target Allocation

Upper and Lower Ranges

Australian Equities

30%

25% - 40%

International Equities

10%

5% - 15%

Property

25%

15% - 30%

Australian Fixed Interest

25%

15% - 30%

Cash

5%

3% - 20%

Alternatives

5%

0% -10%

TOTAL

100%

 

Growth investor

This profile suits a younger member in accumulation phase that recognises the need to concentrate on growth assets. Their superannuation has not yet built up to be of significant value and they have a time horizon of more than 15 years.

Asset Class

Target Allocation

Upper and Lower Ranges

Australian Equities

45%

40% - 55%

International Equities

30%

25% - 35%

Property

15%

5% - 20%

Australian Fixed Interest

2.5%

0% - 10%

Cash

2.5%

0% - 5%

Alternatives

5%

0% - 10%

TOTAL

100%

 

High growth investor

This is the profile for a member who is just starting out on their superannuation journey with regular contributions. They recognise that the value of their investments will drop at times but they also realise that, as they are contributing regularly, they will gain an advantage of buying investments at the lower value thus averaging their cost.

Asset Class

Target Allocation

Upper and Lower Ranges

Australian Equities

55%

40% - 55%

International Equities

30%

25% - 35%

Property

5%

5% - 15%

Australian Fixed Interest

0%

0% - 10%

Cash

2.5%

0% - 5%

Alternatives

7.5%

0% - 10%

TOTAL

100%

 

In the end it is important for trustees of an SMSF to work out what suits their needs and risk profile and set their investment policy accordingly. After all one of the main reasons people choose to have an SMSF is the control it gives them over their own financial future.

Trustees of an SMSF do have a responsibility of understanding what choices they have within each investment asset class. This again is the great benefit of an SMSF, as long as the investment policy and the regulations allow it, the super fund trustees can invest in anything they deem suitable.

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