How SMSFs invested in 2020 – and what this means for 2021

The size of the self managed super fund (SMSF) market now represents one-quarter of the Australian superannuation industry and sits at $676 billion. 

The growth of SMSFs has slowed in recent times, perhaps due to the complexity of managing a large pool of money, as well as the associated expenses. 

However, there are still a great many benefits to being part of an SMSF, including the flexibility of selecting your own investments, knowing exactly what you own and effective tax management. For those with the right tools and advice, it can be the right financial decision for their retirement. 

SMSFs are the fastest growing part of Stockspot’s client base, so we analysed key SMSF trends in 2020 to see what we could learn for 2021. 

1. SMSFs are seeking less advice from financial planners
According to the Investment Trends SMSF Report, the number of SMSFs advised by a financial planner fell from 215,000 to 190,000 year on year. 

At the same time, the majority of SMSFs (61 per cent) indicated a preference for free advice, such as government and investment newsletters, over professional, paid advice.

Self-directed learning is admirable, and it makes sense in light of the cost of traditional financial advisers or planners. However, when there are large sums of money involved, it’s prudent to have some investment advice and assistance in managing a SMSF portfolio.

This is where technology comes in, and where online investment advice seems to be becoming more and more popular for the SMSF investor. 

Stockspot data showed a 29 per cent increase in SMSF clients in 2020, and it’s likely the number of SMSFs using online investment advice will grow, as this group sees there are options that walk the line between flexibility, control and investment advice. 

2. Many SMSFs panicked during the COVID market crash
Between February and May 2020, SMSFs cut their holdings in direct shares to the lowest level since the global financial crisis, with the 2020 SMSF Investor Report showing exposure to shares was reduced by 4 per cent over the past year. 

It was an understandable reaction in uncertain times, but this is where the benefit of financial advice comes in. With a well-diversified portfolio, any investor – SMSF or otherwise – can weather the ups and downs of the market, even during major events such as COVID. 

Unfortunately, many investors focus on a few areas and invest heavily into them. For example, a large portion of Australians own only Australian shares or property. A strategy such as this means your investments aren’t properly diversified and you’ll feel the brunt of any market falls, making it tempting to sell at the wrong time. 

While the broader trend for SMSFs in 2020 was to exit shares, most of our SMSF clients stayed put. That means they didn’t suffer agonising falls when the market crashed, mainly because they included defensive assets in their portfolio (such as investment grade bonds and gold) and had a cushion when growth assets like shares were hit hard during COVID. In fact, owning some bonds and gold protected portfolios from 50–80 per cent of the falls.

3. SMSFs made drastic changes to their portfolio
In 2020, many SMSFs made ‘drastic’ changes to their portfolios of more than 50 per cent. The number of SMSFs that took this course of action was up 4 per cent from 2019 to 8 per cent in May 2020. 

Some trustees became more defensive (55 per cent) and sold their assets into cash. Many SMSFs did this via bond ETFs (9 per cent) or direct bonds (9 per cent). 

In my opinion, drastic portfolio changes to reduce portfolio risk are often driven by emotions and done at the wrong time (generally after the market has already fallen). SMSFs shouldn’t be reacting to markets, but should instead ensure their portfolios aren’t taking on too much risk in the first place by including an appropriate amount of defensive assets. 

4. SMSF holdings in direct property increased
In 2013, trustees allocated 45 per cent of their portfolio to shares. Today, that allocation is down to 31 per cent. As such, property and cash assets have risen. 

Property has traditionally been considered a ‘safe’ investment in Australia, but the pros and cons of this type of investment should be considered: the where, the when and the length of time until retirement. Is your property one that’s going to be sold, or is this a property that’s going to deliver rental yield?

Currently, the gross yield (rent) on houses in capital cities in Australia is 2.8 per cent and 3.8 per cent for units (SQM Research). However, there are substantial running costs that need to be taken into account to arrive at net yield.

If you own an investment property, you’re liable for council rates, management fees, property maintenance and repairs. Additionally, if the property value is above the land tax threshold, you’ll need to pay land tax each year.

As any sensible financial adviser will tell you, holding a diversified portfolio that includes shares, bonds and commodities like gold, leads to steadier returns. If you put all your eggs in the property basket though, you’ll be crossing your fingers and hoping for the best. 

Remember, while the world and the markets will always move erratically, a well thought out strategy will help an investor through stormy weather. 

For all those who stayed invested in during 2020 – congratulations. It wasn’t easy, but here’s to 2021 and to a year of positive returns. 

Do you have a SMSF? Do you seek professional financial advice?

Chris Brycki is a passionate consumer champion and founder and CEO of Stockspot, Australia’s biggest online investment adviser. With more than 21 years of investment experience, he sits on two advisory committees for industry regulator ASIC, and was previously a fund manager at UBS. He has holds a commerce degree from UNSW.

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