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Sharemarket volatilty hits SMSF retirees

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The savage and unpredictable nature of the sharemarket's gyrations has been disconcerting for SMSF retirees. It underlines the importance of holding sufficient cash to see you through even the most prolonged period of turbulence.

Integral Private Wealth principal adviser David Simon says volatility is part and parcel of investing and you should have cash for at least two years set aside.

"You need to ensure that you can withstand volatility without having to sell shares prematurely in order to fund pension income or other requirements," he says. "You may also want to take advantage of markets like this." He says an extra three years of fixed interest investments would be ideal. "History tells us that a downturn in the sharemarket can last up to five years and in rare circumstances seven years. So if you've got five years of cash and fixed interest as an ongoing discipline, you are almost assured to withstand even the worst of markets.

"If you are in an environment where markets are tremendously distressed, then you could also use some of that cash or fixed interest to purchase assets while they are cheap. So it's not just making sure you are making provisions for income and lump sums and to withstand volatility. It's also there to take advantage of markets if they become distressed."

He doubts the uncertainty spooking markets will "end abruptly", given global headwinds: China's economy slowing more than expected, the US delaying its interest rate rise, Greece's debt and geopolitical uncertainty. This is where a disciplined approach to investing counts.

"Some investors really love this environment," says Simon. "They see it as a great opportunity to buy quality companies with great cash flow and low debt that are being pulled down by the rest of the market. For them, it's like the Boxing Day sales. Other investors will panic because they don't have the tolerance for volatility and look at it as a grave risk. But the experienced investor will be cruising through this environment."

He says SMSF trustees should rebalance their portfolio to bring their asset allocation back into line as well as review their individual assets. "I'm not a believer in being a spectator. It's a cop-out to say 'just ride it out it will be fine'. You could be doing that with an asset that is doomed, that doesn't have the capacity to recover. Is it underperforming, or is it distressed because the overall market is down? Is it still a good company that is going to make money? Don't just take for granted what you are holding.

"You should have an ongoing review - even more so now; not just with individual companies but sectors and regions as well. Is Asia still the place to invest? Is Europe about to turn around? You need to be vigilant, not just due to the current market but on an ongoing basis."

The market volatility of the past few months has underpinned the critical importance of SMSF trustees having a written investment strategy and sticking to it.

Graeme Colley, director of technical and professional standards at the SMSF Association, says when markets fluctuate to the degree they have, leaving investors rattled, having a written, long-term investment strategy not only gives trustees peace of mind but it should also remind them that super is all about the long term. "It provides them with an important reference point at the very time when people are liable to panic because the markets, especially the equity markets, are falling sharply.

"When you consider an SMSF fund has, on average, about one-third of its assets in Australian shares, the reassurance the investment strategy provides cannot be under-estimated."

According to the latest Intimate with Self-Managed Superannuation report, just over 50% of trustees claim to have a written investment strategy, and another 30% entrust their specialist adviser with this responsibility. "Whether trustees take personal responsibility for this document - a legal requirement under the Superannuation Industry (Supervision) Act 1993 - or hand the responsibility to their adviser, it's encouraging that about 80% of SMSFs realise its importance.

"What's concerning is that there are about one in five trustees who don't have a written strategy, and it's likely they will be more prone to making poor decisions, especially when markets are volatile.

"As the report says, 'these trustees could be exposing themselves to investment and legal risks by not having an investment strategy or by only having it memorised and not written down'," Colley says.

Stick to the written strategy

The market volatility of the past few months has highlighted the critical importance of a written investment strategy for SMSF trustees - and that they stick to it.

Graeme Colley, director of technical and professional standards at the SMSF Association, says when markets fluctuate to the degree they have, rattling investors, a written, long-term investment strategy not only gives trustees peace of mind but it should also remind them that super is all about the long term.

"It provides them with an important reference point at the very time when people are liable to panic because the markets, especially the equity markets, are falling sharply. When you consider an SMSF fund has, on average, about one-third of its assets in Australian shares, the reassurance the investment strategy provides cannot be underestimated."

According to the latest Intimate with Self-Managed Superannuation report, just over 50% of trustees claim to have a written investment strategy and another 30% entrust their adviser with this responsibility.

"Whether trustees take personal responsibility for this document - a legal requirement under the Superannuation Industry (Supervision) Act 1993 - or hand the responsibility to their adviser, it's encouraging that about 80% of SMSFs realise its importance.

"What's concerning is that there are about one in five trustees who don't have a written strategy and it's likely they will be more prone to making poor decisions, especially when markets are volatile.

"As the report says, 'these trustees could be exposing themselves to investment and legal risks by not having an investment strategy or by only having it memorised and not written down'," Colley says.

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Vita Palestrant was the editor of the Money section of The Sydney Morning Herald and The Age. She has worked on major metropolitan newspapers here and overseas and has won several prestigious journalism awards including the 2001 Citigroup Award for Excellence in Journalism, Personal Finance Category.
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