Fixed Interest & BondsInvestor PsychologySMSF Strategies

Low rates pushing SMSFs to look beyond cash

26 Nov 2021 8 month(s) ago

Predictably, the low interest rates on cash are forcing SMSF investors to look elsewhere, especially shares.

The historically low interest rates are changing how SMSF investors are thinking about risk and reward. For those with a low appetite for risk, cash is often preferred as a way to feel safe. But with rates at almost zero, the risk of not getting a return is now as much in investors minds as potentially losing some capital with higher risk/higher return options.

A Vanguard survey of SMSF owners has found that the low interest rate environment is fueling intentions to decrease allocation to cash. Almost half think that cash is a poor investment, and 40 per cent think that they have to look at other options (both these numbers are surprisingly low given that rates on cash mean that, after inflation, investors are going backwards):

The preferred option for most SMSFs is equities, shares. SMSFs are most often looking to increase their allocation to domestic and international equities over the next year. Both property and bonds rank relatively low:

Michael Lorimer, Managing Director of the Self-managed Independent Superannuation Funds Association (SISFA) says the ATO has suggested SMSFs are often poorly diversified. “Auditors have been paying closer attention to SMSF investment strategies to ensure trustees properly consider their fund’s liquidity and cash flow requirement.”

With soaring property prices, which are in part a consequence of the low interest rates, investing in property tends to preclude the option of diversification. Lorimer says:

“Because of the high ticket price of investing in direct property, the reality for many SMSFs is that if they choose to invest in a property directly, it is very difficult to diversify beyond that. For SMSFs, passive property exposure is not complicated. But whether it stacks up financially is another consideration.”

Lorimer notes that while cash and bonds are currently struggling to deliver the returns SMSFs expect, it’s still important to have some defensive assets within your portfolio as a buffer against market volatility and inflation.

He believes there are other options, such as SMSFs effectively becoming the bank in private debt deals.

“With the ability to generate income in the low-interest-rate environment still one of the largest retirement concerns for SMSFs, alternative income strategies like private debt could be the answer.


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