SMSFs understand need for diversification

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Most SMSFs acknowledge the importance of diversification.

The majority of SMSF trustees understand the importance of portfolio diversification, contrary to popular belief, however, many still find it difficult to execute, according to new research.

The “2018 Vanguard/Investment Trends Self-Managed Super Fund Reports” found 82 per cent of those surveyed for the research believe diversification is important.

Investment Trends chief executive Michael Blomfield told a media briefing in Sydney the result is a positive finding in light of the perception SMSF portfolios are not diversified enough, but added it indicates financial advisers need to communicate the concept better without use of terms such as asset allocation.

“So the industry has got to do a much better job of not using just a bunch of fancy terms that serve our interest and start speaking to people,” Blomfield said today.

“It’s longer form, but it’s no good going out and saying: ‘Have you thought about asset allocation?’ We need to be saying: ‘Have you thought about the balance in your portfolio between Australian shares, international shares, fixed income and fixed interest, property?’”

While 45 per cent strongly agreed, 37 per cent somewhat agreed with the statement that it is important for SMSFs to be well diversified across different investment types.

Investment Trends head of wealth management research Recep Peker said two questions were added to the survey this year in relation to the importance of diversification.

“This matters because still there’s about a third of SMSFs who have over half their assets in direct shares and there’s about 10 per cent of SMSFs who have over half their assets in property,” Peker said.

The research, conducted between February and March, revealed while almost half of respondents strongly agree SMSF portfolios should be well diversified, only 13 per cent believe their SMSF portfolio is currently very well diversified, while a further 1 per cent said there is still some way to go before their portfolios reach their desired level of diversification.

However, 41 per cent said their portfolio is well diversified, while 37 per cent believe they are somewhat diversified.

For the first time, Investment Trends asked trustees what they consider a well-diversified portfolio to be.

The responses revealed 26 per cent considered 10 shares to be a well-diversified investment portfolio, while 66 per cent considered 20 shares well diversified. However, 84 per cent of all respondents considered 30 shares a well-diversified portfolio.

Only 12 per cent thought portfolios with exposure only to the ASX 200 to be sufficiently diversified, while 68 per cent believed a well-balanced portfolio should contain both Australian and overseas shares.

In terms of exchange-traded funds (ETF), 35 per cent believed portfolios should contain a mixture of ETFs, shares and property.

SMSF investors indicated they intend to reduce their exposure to blue-chip shares outside of managed funds over the next 12 months, with less than 50 per cent intending to invest in the assets, down from over 70 per cent in 2014.

Appetite for investing in international shares over the next year has increased from just over 20 per cent in 2014 to almost 30 per cent in 2018, while interest in ETFs has also grown, with investors viewing them as a low-cost way of diversifying their portfolio.

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