Self-managed super funds (SMSFs) offer control and flexibility over your retirement savings. But with control comes responsibility—especially when it comes to diversification. Holding too much of your SMSF in a single asset or asset class can increase risk and reduce long-term returns. A well-diversified portfolio balances growth potential, risk management, and income generation, helping secure retirement outcomes.
This guide explains why diversification matters, how to spread risk effectively, and how to monitor your SMSF to keep it on track.
1. Why Concentration Hurts Outcomes
Concentration risk occurs when a significant portion of your SMSF is invested in one asset, company, or asset class.
Key Risks:
- Market volatility: A downturn in a single stock or sector can dramatically reduce your SMSF value.
- Income instability: Over-reliance on one income source, such as rental property or dividends from one company, can create cash-flow gaps.
- Compliance and liquidity issues: SMSF rules require diversification and liquidity to meet pension payments; excessive concentration can breach these requirements.
Example:
If 60% of your SMSF is invested in a single property and the property market falls, a large portion of your retirement savings is at risk. Diversification spreads this risk and improves portfolio resilience.
2. Spreading Risk Across Assets
Diversification is about mixing assets with different risk and return profiles to protect against unexpected events.
Common Asset Classes for SMSFs:
- Cash and term deposits: Low risk, high liquidity, stable income.
- Australian and international shares: Potential for capital growth and dividends.
- Property (direct and listed): Provides rental income and diversification away from shares.
- Fixed income/bonds: Reduce volatility and provide predictable income streams.
- Alternative assets: Infrastructure, private equity, or commodities can further spread risk.
Building an Asset Mix:
- Determine your risk tolerance and retirement horizon.
- Allocate between growth (shares, property) and defensive (cash, bonds) assets.
- Rebalance periodically to maintain the intended mix as markets fluctuate.
Diversification is not just about quantity—it’s about choosing assets that behave differently under varying market conditions.
3. Monitoring Performance and Fees
Holding a diversified portfolio is only effective if performance is tracked and costs are managed.
Performance Monitoring:
- Compare returns against benchmarks for each asset class.
- Assess whether each investment meets your SMSF’s objectives.
- Track income generation to ensure sufficient cash flow for pensions or contributions.
Fee Management:
- High management fees can erode long-term returns.
- Review platform, administration, and investment fees annually.
- Consider lower-cost options, such as ETFs or index funds, where appropriate.
Effective monitoring ensures your SMSF works efficiently, without being undermined by excessive fees or underperforming assets.
4. Annual Investment Strategy Review
SMSF trustees are legally required to have a documented investment strategy that is reviewed regularly.
Key Considerations in the Review:
- Risk tolerance: Has your capacity to take risk changed due to age or lifestyle?
- Asset allocation: Does the current mix align with your long-term retirement goals?
- Performance and liquidity: Are all investments performing as expected? Can assets be accessed when needed?
- Regulatory compliance: Ensure the strategy aligns with SMSF rules on diversification, borrowing, and related-party transactions.
An annual review allows trustees to adjust allocations, divest underperforming investments, and explore new opportunities while remaining compliant with superannuation legislation.
Final Thoughts
Diversification is fundamental to SMSF success. Over-concentration in a single asset or asset class can jeopardise retirement outcomes, while spreading risk across a balanced mix provides both growth and stability. By monitoring performance, managing fees, and conducting an annual investment strategy review, SMSF trustees can build a resilient portfolio that meets long-term retirement objectives.
SMSFs offer freedom, but with that freedom comes responsibility—structured diversification ensures your retirement savings are protected, adaptable, and positioned for sustainable income over time.