The GFC destabilised markets and economies in unprecedented ways impacting the performance of a great number of managed funds who during the GFC and on its aftermaths delivered negative returns to investors.
This brought the so called modern portfolio theory under scrutiny and led investors to distrust and become sceptical of Fund Managers’ capabilities to manage investments and generate returns.
The trending question among investors was: ‘Why are we paying fees to these so called Fund Managers who only manage to lose our money?
Let's cut the middle man we are better off investing the money ourselves.’
While negative returns and distrust might have pushed several investors to undertake the SMSF challenge it doesn't really mean they are capable of engineering better portfolios.
Having said that SMSFs are growing like rabbits.
Being allowed to do things on your own doesn't mean you should or that you know what you are doing.
If there were laws that allowed you to scuba dive on your own without training and without a trainer you would probably realise the high risk and the negligence of doing so.
Unfortunately understanding the risks/return parameters with investments requires not only common sense but a lot of knowledge.
If you don't know how to quantify investment risk should you manage your own portfolio?
Do investors' up taking SMSF structures know what they are doing?
Well to make a point consider the following -. You can't self-prescribe a medication unless I'm assuming you are doctor, but yet you can self-advice on investments without any credentials.
If you need specific credentials to give advice on SMSFs as a financial planner, shouldn't you need specific credentials to be eligible to advise yourself?
Shouldn't at least 1 of the SMSF trustees have adequate accredited knowledge?
If this is not the case shouldn't they be required to get professional advice?
Perhaps in theory the thinking was that if SMSF investors need assistance they can always get financial advice.
However, it might be too late when they actually turn up for advice. Normally things would have gone bad already if you turn up to a Doctor after prescribing yourself.
The purpose of superannuation is setting money aside for retirement, not for gambling until retirement.
How many SMSFs are really capable of engineering better portfolios than fund managers?
Yes, they might have produced some positive returns since the GFC and might be happy to have bought that placebo marketing pill that makes them feel that they have taken control of their futures.
SMSF portfolios are very heavily concentrated toward domestic investments;
- Term deposits
The mighty United States of America underwent what some thought was impossible a crisis, but I guess this could not happen in the foreseeable future to Australia.
I'm personally optimistic about the Australian economy outlook but I don't have a crystal ball.
Could shadow banking in China emerge with a few surprises causing a slowdown that could filter into the Australian economy? I hope not. I also hope SMSFs assess whether it's worth putting all of their eggs in one basket and quantify not just returns but the risks being undertaken.
Can investors afford another hit having already been impacted by the GFC?
Are SMSFs in a better position to weather out a storm?
Do get involved on your investments and be cautious of advice but don't self-prescribe unless you are a Doctor and don't go scuba diving without training and without a trainer even if you are allowed to.
Strategic View Point by
Senior Manager of Strategic Business Initiatives
at BIZNEX Consulting