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Why too much money in cash can be a SMSF’s financial downfall

Without doubt, SMSF’s continue to be the most popular choice for Australians looking to chase better returns in the superannuation and wealth creation environment. More and more of the Australian aging population are establishing their own Self Managed Super Fund.  In fact, the Australian Taxation Office reported that SMSF’s grew from 570,689 on 31 March 2016 to 577,236 as at 30 June 2016.  Almost 7,000 new SMFS’s were set up in a three (3) month period.

The Australian Taxation Office also reported that the value of assets held in these Funds have also grown by 2.7 per cent with the current value of assets totalling approximately $621 billion and make up 30 per cent of the total assets in Australian superannuation.

It is anticipated that SMSF numbers will continue to grow, and as SMSF’s assets continue to grow, they will account for a larger percentage of the total superannuation pool, which is currently $2.1 trillion. The continued growth of SMSF’s is a positive trend for SMSF Trustees, and those looking to set up a Self Managed Super Fund, because it means that SMSF Trustees will continue to be capable of influencing investment markets.  Past investment behaviour, and their interest in investing in property within a Self Managed Super Fund, led to changes to the SMSF rules and allowed SMSF investors to invest in direct property.  This is just one example of the power and influence SMSF Trustees have to bring about significant change to their sector.

In the same March to June 2016 financial quarter, cash and term deposit holdings within the SMSF sector accounted for approximately 26 per cent of the total value of assets across the board in Self Managed Super Funds. Across the board, 26 per cent does not appear unreasonable.  However, there are many Funds that are holding significantly more than 26 per cent in cash.

Those that are holding significant cash may find that over time they may endanger their ability to grow wealth and may reduce their investment returns. In this current economic climate particularly, where interest rates are very low and have been for a considerable time, SMSF Trustees holding considerable Cash in their SMSF Portfolio will find that the value of their cash will probably diminish in real terms.

Although a ‘Self’ Managed Super Fund for many Trustees means ‘going it alone’, some guidance is necessary as a lack of diversification can increase your risk. An investment strategy focused on balancing out returns, invested over a diversified class of assets and with exposure to growth assets, will help you grow your wealth and the value of your portfolio in real terms.

The goal of a SMSF should be to hold investments that are diversified so that over time your investments will reward you with capital growth which will boost your wealth significantly.

In the main, SMSF Trustees continue to invest in three main investments; cash, direct shares, and direct property.

Direct property investments within a SMSF, both residential and commercial, have grown significantly and are continuing to do so. Direct property has been producing higher yields to investors (3-5% for residential, 7-8% for commercial) and this is continuing to drive SMSF investors towards direct property investments with the view that in the long term the capital growth in direct property investments may well challenge the capital growth of shares.

Cash within a SMSF will, over considerable time, struggle to compete with growing its’ real value compared to direct shares and direct property. However, cash does play an important role for unforeseen circumstances.  Given that some level of cash is important to a SMSF’s investment portfolio, it is important that the cash is getting the best return possible.

How much is too much cash in your Self Managed Super Fund is a question you and your Advisor should explore, because too much cash will not give you the best capital growth your SMSF is capable of. And given that it will continue to become more difficult to access the Centrelink Age Pension, and the federal governments’ progressive plan to increase the number of Self Funded Retirees, your Superannuation Funds’ growth and performance over time will be fundamental to the lifestyle you can afford to enjoy in retirement.

Sources:

Australian Taxation Office Data, Jason Dunn, REIWA, Centrelink

Disclaimer:

The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.

Paul Baggetta is the Founder & Principal of Baggetta & Co. Paul Baggetta has been a Taxation Accountant for over 36 years, a Financial Planner for over 18 years and in 1993 qualified as a Real Estate Licensee, holding a Triennial Certificate (currently not trading), and operated his own Real Estate business for property investment clients for over 5 years as a second business.

Financial planning services provided by Paul Baggetta as an Authorised Representative (No. 261469) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. Australian Financial Services License No. 223135. 

Taxation & Accounting services provided by Paul Baggetta as a Registered Tax Agent (No.61487008) and is a Member of SMSF Association, IPA & NTAA.

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The information provided on this website, including the material and contents provided in the website publications, are informative in nature only and you should not act specifically on the basis of this information alone. It should not be used as a substitute for legal, business, accounting, tax, financial planning or other professional advice. If expert assistance is required, professional advice should be obtained.

Paul Baggetta is the Founder & Principal of Baggetta & Co. Paul Baggetta has been a Taxation Accountant since 1981, a Financial Planner since 1998, and in 1993 qualified as a Real Estate Licensee, holding a Triennial Certificate (currently not trading) and operated his own Real Estate business for property investment clients for over 5 years as a second business.

Financial planning services are provided by Paul Baggetta as an Authorised Representative (No. 261469) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. Australian Financial Services License No. 223135.

 

Taxation & Accounting services are provided by Paul Baggetta as a Registered Tax Agent (No.61487008) and is a Member of SMSF Association, FIPA & NTAA.