Part of compliance for SMSF trustees is the Investment Strategy, which considers the investment risk – but you also need to keep in mind each member’s Risk Profile as well as the importance of it – here we also look at tools to assist, but also cautions to consider in the process!
As part of the investment strategy the investment risk needs to be considered, but also risk relates to the members – what is THEIR Risk profile (tolerance/general group they fall with)? All investments are a trade-off of risk and return, so risk profiling may help measure a person’s willingness to take more or less risk – in other words their tolerance from low to high risk. Often trustee/members believe they know how much risk they want to take and invest narrowly in one major class eg property or shares (or worse, with many SMSF – only cash and term deposits/fixed interest).
So are you like a Volvo driver (safe and conservative), or Rally Car Driver (eager for speed and adventure)? A financial advisor, or other sources can supply tools to help determine a person’s profile. Knowing this means trustees can invest more academically to align with member profiles.
A generally agreed grouping suggests 6 risk profiles, and examples of investment spread in the following table might be –
The amounts above are %, and each column/profile totals to 100%, that is, all the monies and how much in each asset class.
Mistakes with risk profiling can include forgetting to review profiles over time as people’s attitudes change, forgetting to consider future investment changes, misinterpreting tool results, forgetting the time horizon etc. For more detail about mistakes, go HERE.
What mix do you consider fits your member profiles?
What are your thoughts? Start or continue the conversation here!
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