Building your Self-Managed Super Fund investment strategy from scratch

Under the Superannuation Industry (Supervision) Act 1993 (commonly called the SIS Act), trustees must establish an investment strategy that meets the needs of all members.

But setting a strategy isn't just a legal box to tick – it's also key to growing your retirement savings.

Here's what you need to know about SMSF investment strategies, and how to build one from scratch.

What is an SMSF investment strategy?

An SMSF's investment strategy is the roadmap for growing its members' retirement wealth. It sets out what the fund will invest in, when it will invest, and how long it will hold different assets. It also explains why and how these investment decisions will support the fund's goals.

According to the Australian Taxation Office (ATO), a good investment strategy ensures your SMSF operates both in the best interests of its members and in compliance with super laws.

While financial advisers can help design an SMSF investment strategy, it's ultimately the trustees' responsibility to keep the fund compliant.

See also: Guide to setting up a self-managed super fund

How to build your SMSF investment strategy

Building your SMSF's investment strategy starts with setting clear objectives and understanding the needs of all fund members. Here's a step-by-step approach:

• Set retirement goals
  Define what the fund is aiming to achieve for its members – for example, generating steady income in retirement or maximising capital growth in earlier years.

• Understand other SMSF's members' position
  Consider each member's age, retirement timeline, risk tolerance, and insurance needs.

• Select asset classes
  Choose a mix of investments (for instance, cash, fixed interest, shares, property) that align with members' goals and risk appetite.

• Plan your diversification
  Spread investments across different asset types to manage risk and reduce reliance on a single investment.

• Ensure liquidity
  Make sure the fund can meet cash flow needs, like paying pensions, taxes, and expenses.

• Document your reasoning
  Explain why each investment decision supports your goals.

• Review regularly
  Update your strategy after major life events (like new members or retirement) or major market movements.

Example
If your SMSF includes one member in their 30s and one nearing retirement, your strategy might allocate more to growth assets for the younger member while prioritising income-generating or defensive assets for the older member.

Staying compliant with your SMSF investment strategy

When creating your SMSF's investment strategy, you have flexibility to choose the types of assets you want to invest in – such as shares, property, cash, or even alternatives like cryptocurrency. You can also choose whether your SMSF leverages in order to invest by taking out SMSF loans.

However, there are important compliance rules you must follow:

• Trust deed
  Your investments must be allowed under the fund's trust deed.

• Super laws
  Your investments must comply with the Superannuation Industry (Supervision) Act 1993.

• Sole purpose test
  All investments must be made solely to provide retirement benefits to members – not for personal use or gain before retirement.

• Diversification and asset allocation
  The ATO expects your investment strategy to demonstrate how your assets are diversified to manage risk or to address the risks of a lack of diversification.

Simply stating your SMSF will invest '0-100% in shares' or '0-100% in property' without explaining your investment approach is no longer acceptable. You must articulate how and why your SMSF's specific asset mix meets members' retirement goals.

If your investment choices breach super laws – or your strategy fails to properly address these requirements – the ATO may take compliance action. This could include financial penalties or even your removal as an SMSF trustee.

When should you review your SMSF investment strategy?

Your SMSF investment strategy isn't set in stone – it must be reviewed regularly to ensure it continues to meet the current and future needs of all members. Typically, you should review your investment strategy at least once a year, usually as part of your fund's annual audit.

However, some events require an immediate review of your strategy, including:

• A major market correction that changes the risk profile of your investments

• The addition of a new member to the fund

• The departure, retirement, or death of an existing member

• A member starting a pension phase

• Significant changes in members' financial circumstances or retirement goals

Regular reviews help ensure your SMSF remains compliant with super laws and better aligned with your members' evolving needs.

What role does the SMSF auditor play in your investment strategy?

Each year, your SMSF auditor will review your fund's investment strategy as part of the annual audit process.

The auditor will check:

• Whether your SMSF has a written investment strategy that addresses key factors like risks, diversification, liquidity, liabilities, and insurance

• Whether your investments align with the documented strategy

• Whether you have reviewed your investment strategy during the financial year

If the auditor identifies any breaches, they may be required to report them to the Australian Taxation Office (ATO).

Keeping your investment strategy up-to-date and compliant can help you avoid penalties and demonstrate good fund governance.

SMSF investment strategy FAQs

Can my SMSF invest heavily in just one asset class, like property?

Yes, but you must clearly explain why this concentrated investment approach is appropriate and how it meets your fund's objectives.

How often should I review my SMSF investment strategy?

You should review it at least annually and after major events like market downturns, adding or losing a member, or starting retirement phase.

What happens if my SMSF doesn't have a compliant investment strategy?

Your auditor may report the breach to the ATO, and you could face penalties or be disqualified as a trustee.

Can each member have a different investment approach?

Yes, some SMSFs create individual strategies for each member if their risk profiles and goals differ significantly. Otherwise, the fund's strategy must balance all members' needs.

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_{Article originally written by Gerv Tacadena. Last updated by Brooke Cooper in 2024.}

_{Image by Irina on Unsplash}