What the law actually requires

Under the Superannuation regulations, an SMSF's Investment strategy must be formulated and given effect having regard to the whole circumstances of the fund. This includes the risk and likely return of investments, diversification, the Liquidity of the fund's assets, its ability to pay expenses and benefits as they fall due, and whether to hold insurance for members.

These matters must genuinely be considered and reflect the actual circumstances of the fund and its members, rather than repeating generic wording.

Beyond a shopping list

Listing asset classes and percentage ranges is part of a strategy, but is not sufficient alone. The document connects the investments to the members' objectives: their ages, time horizon to retirement, Risk tolerance and the income the fund will need to provide.

Stated objectives give the strategy a yardstick against which trustees, and the auditor, can judge whether the chosen investments are consistent with what the fund is trying to achieve.

Diversification and concentration risk

The regulations require trustees to consider diversification, or the lack of it. A fund is not banned from holding most of its Wealth in a single asset, such as one property, but if it does, the trustees are expected to acknowledge the concentration risk and document why they consider it appropriate given the members' circumstances.

The ATO has drawn attention to funds heavily weighted to a single asset, especially where borrowing is involved. Addressing concentration does not necessarily mean selling the asset; it means acknowledging the risk, explaining the reasoning, and noting any steps that manage it.

Liquidity, Cash Flow and insurance

A strategy must consider whether the fund can meet its obligations in cash. Expenses such as the audit, the supervisory levy and, in pension phase, minimum drawdowns must be paid on time, so the asset mix needs enough liquidity to cover them.

The requirement to consider insurance is a separate matter: trustees do not have to hold cover, but they must consider whether the fund should provide insurance for its members and record that they thought about it.

Writing it down and following it

A strategy only functions if it is documented and actually followed. Investments should be consistent with the written plan, and where the fund drifts away from it, the trustees rebalance or update the strategy with a documented decision.

Consider a hypothetical example. A fund's strategy sets a 20 to 40 per cent range for Australian shares, but over a strong year the holding grows to 55 per cent. The trustees note the position and decide whether to rebalance or revise the range, rather than letting the actual portfolio and the written strategy diverge.