Education

The practical ways to diversify your portfolio

By AMP Capital

The nearer you get to retirement, the more important it becomes to plan for two key risks for your SMSF: longevity and sequencing risk.

One of the best ways to address these risks is to ensure you are diversified – that is to make sure you are investing in a basket of differentiated assets to help protect portfolio returns.

Let’s take a look at Longevity risk first, since that’s the one investors seem to fear the most.

Longevity risk - The risk you’ll outlive your retirement savings. This is a really common fear and it can lead some people to get their risk-return ratio out of whack. If you invest too conservatively, it can actually increase the longevity risk of a portfolio.
Sequencing risk - The risk of an investment performing poorly at precisely the wrong time. For example, if a person entering retirement suffers a dramatic loss, the portfolio may not have enough time to recover even if the market does eventually rebound.

Making sure your portfolio is diversified enough is a good way to help reduce these risks. Do this by ensuring you have exposure to different asset classes, such as infrastructure, fixed interest, commercial property, or global shares, on top of your regular basket of Australian equities.

Many SMSF trustees, who often have limited assets, feel like it is difficult to achieve true diversification. Fortunately, there are easy and practical ways to get exposure to a broad range of assets for your SMSF, with both unlisted and listed options available.

What is the difference between listed and unlisted investments?


The main difference between listed and unlisted investments is that unlisted investments are less volatile. That is, their valuations are less likely to move up or down dramatically based on market conditions, as they are not traded on public markets. Importantly, valuations of listed and unlisted assets tend not to move together. The trade-off for a listed asset is the ease of access to the asset class, or liquidity through the share market.

Listed and unlisted assets are complementary investments, and a combination of both is often considered a sound diversification strategy. Having the right mix of low to high-risk assets, both listed and unlisted, will help you to manage both longevity risk and sequencing risk in your portfolio.

Unlisted: Managed funds

Australian SMSF investors eager to gain exposure to otherwise difficult to access assets, including bonds, large-scale commercial property, global companies, and unlisted infrastructure often invest via managed funds.

Nearly a quarter of SMSF investors intend to invest in a managed fund this year, while a further 48% intend to do so in the future*. The top reason for doing so was access to investments otherwise out of reach, followed by international diversification.

Managed funds enable investors to access a basket of assets diversified across asset types, geography, sector, and underlying risk factors. They also may be appealing for investors less confident with assets outside of the ASX and would prefer to outsource the management of risk and investment selection to a professional investment manager.

Investors purchase units in the unlisted funds, which are typically either open-ended or closed-ended.

Open vs closed ended funds

Fund managers will typically have strategies in place to manage exchange rate risks and other risks, and teams of analysts to assess potential investments for the fund. This takes day-to-day management out of the hands of individual investors. It’s important to select managed funds aligned to your investment strategy, time horizon, goals and understand all fees involved.

AMP Capital's SMSF Suite has been designed with SMSF and Self-Directed Investors in mind, offering access to investment opportunities that would normally only be available to large retail and industry super funds. Find out more about these institutional grade investment opportunities.

Listed: Exchange traded funds (ETFs)

ETFs are also growing in popularity. According to the survey, of those SMSF trustees intending to invest in managed funds over the next 12 months, nearly a quarter would like to do so via an ETF.

Passive ETFs are a type of investment listed on a stock exchange that track the returns of a specific index or market sector. For example, an ETF may track a global index such as the Global Healthcare index, or a range of regional indices.

They can be bought and sold like ordinary shares using a stock broker or online trading account, which means they can be a relatively low-cost way for investors to get exposure to otherwise difficult to access assets such as international shares or infrastructure. ETFs come with different risks, so be sure to read the PDS to understand what risks are involved.

Active ETFs, a new form of ETFs are now available. They provide the benefits of ETFs coupled with the potential for outperformance. AMP Capital offers three Active ETFs that provide investors with exposure to hard to reach asset classes such as infrastructure and other global property. Find out more about our Active ETFs.

*Based on responses of 679 SMSF investors surveyed in December 2017

  • Education
  • SMSF News

Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

Cookies & Tracking on our website.  We use basic cookies to help remember selections you make on the website and to make the site work. We also use non-essential cookies, website tracking as well as analytics - so we can amongst other things, show which of our products and services may be relevant for you, and tailor marketing (if you have agreed to this). More details about our use of cookies and website analytics can be found here
You can turn off cookie collection and/or website tracking by updating your cookies & tracking preferences in your browser settings.