Are diamonds really an SMSF investor's best friend?
Investing in diamonds can be a great way to diversify your SMSF.
Historically, they have had strong long-term returns and were not influenced by the volatility of the financial markets.
However, diamonds are not necessarily a "rock" solid investment and there are some risks you should be aware of with these precious stones.
So before you add some sparkle to your SMSF, here are a few tips to get you started.
1. Think long-term
Investing in diamonds is a long-term strategy for your SMSF, as they don't offer daily liquidity like other assets such as shares.
You may need at least a five-year timeframe to allow your investment to provide a good return.
If you are nearing retirement, investing in diamonds with an SMSF may not be the best strategy.
2. Conduct thorough research
Not all diamonds are suitable for investment. That's why it's important to conduct thorough research on the gems you're considering before taking the plunge.
Stay away from gems that are common in the market, as their resale value may be very close to the purchase price.
Also avoid complex jewellery, as it can be difficult to sell and often doesn't provide significant returns.
A good rule of thumb is to focus on basic diamonds that are unset, as these are the easiest to purchase and sell.
3. Quality certification
Ensure the diamonds you're investing in are properly certified.
While there are many gemmological laboratories that can certify diamonds, the reports issued by the Gemological Institute of America (GIA) are the most globally recognised.
It's important to note that the GIA grades all diamonds, even poor quality ones. So not all diamonds that have a GIA grading report are suitable investments.
If you are unsure of a diamonds' quality, or need help finding the right diamond for your portfolio, it may be beneficial to work with a specialist diamond broker.
4. Storage or CFD
Diamonds purchased with an SMSF cannot be stored or displayed in a trustee's home, or the home of a related party.
In fact, the gems must be stored in a secure vault and their location documented with a written record to ensure this storage is appropriate for an SMSF. Diamonds, like all SMSF investment assets, need to pass the sole-purpose test.
Many SMSF trustees choose to either store the diamonds in a bank vault or invest through a CFD, which means no physical assets are ever owned by the SMSF itself.
5. Transaction costs
The transaction costs associated with the delivery of your SMSF's diamond also need to be considered.
These can range anywhere between 2%-5% of the diamond and will be an additional investment cost that your SMSF will need to bear.
While investing in diamonds can be a great way to diversify your SMSF and certainly sounds glamorous, it may not be the right choice for your circumstances or level of expertise.
Do your research and speak to the experts to ensure you are pursuing a suitable asset for your investment strategy. After all, you don't want your retirement savings to hit the rocks.