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5 Common Pitfalls in SMSF Investing & How to Avoid Them

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Self-managed super fund (SMSF) investing can be highly rewarding, but it needs to be done correctly if you want to see the full benefits. This guide is here to help if you’re looking to set up an SMSF and avoid the most common SMSF investing pitfalls. Here’s what you need to know:

Failing to Comply With SMSF Regulations

One of the most common self-managed super fund mistakes is failing to comply with regulations. SMSF compliance is absolutely essential in Australia, and investors who fail to meet the requirements can face penalties. The best way to avoid these is to read the requirements online and speak to a qualified professional advisor. The Australian Taxation Office (ATO) provides extensive guidance on how to invest lawfully.

As part of SMSF legal requirements, you must:

Meet the sole purpose test.
Meet restrictions on investments.
Demonstrate “commercial arm’s length basis” for your investments.
Clearly own the fund.

Lack of Diversification

Lack of SMSF diversification is another common trap. Many investors fail to spread their investments across different asset classes, leading to significant losses.

The easiest way to get around this is to put money into uncorrelated assets. For example, you could split your portfolio into gold, property, bonds, and shares. You could also diversify within those categories, perhaps choosing assets that have little to do with each other (like commercial warehousing and buy-to-let rentals). Doing so allows you to minimise risk and enhance potential returns by spreading your investments across different areas.

Lack of Liquidity Planning

A lack of liquidity planning is another issue that can trip up individuals with SMSFs. While investing in assets like property is exciting, maintaining cash flow is also critical. Therefore, any sound SMSF investment strategy should consider cash flow—the money you need now and over the following months to cover your expenses. Putting money away in investment funds is exciting, but it can lead to losses if done incorrectly.

Therefore, before investing:

Work out how much cash you need over the coming months
Set aside cash to cover expenses and maintain your assets
Ensure you have sufficient cash to continue living your desired lifestyle

Misunderstanding Tax Implications

Misunderstanding the tax implications that SMSF trustees and members must absorb is another issue that can emerge when managing your own super without proper advice or a clear understanding of the regulations. Rules vary depending on when you contribute and withdraw, which can cause confusion.

To avoid this problem, read how the ATO taxes your SMSF and talk to your tax advisor. Usually, you will pay a concessional rate (lower rate) of 15% on your contributions and 0% if you withdraw as a retiree. Be careful, though: the ATO may choose to apply a 45% rate as a penalty if you break SMSF rules.

Misunderstanding SMSF Trustee Responsibilities

Finally, you can get into trouble if you misunderstand your SMSF trustee responsibilities. As a trustee, you have a duty to ensure you meet the sole purpose test, correctly value SMSF assets, and prepare SMSF statements. Consulting a qualified advisor can help you avoid making costly mistakes that could harm your returns.

The Importance of Making the Right Investment Decision

When you manage your own SMSF, you’re personally responsible for the fund’s investment decisions and its performance. Every choice you make affects your retirement savings and future financial security. Poor or unsuitable investments (like those above) can reduce your fund’s growth and jeopardise your long-term financial stability. Fortunately, that’s where we come in.

At EC.Pohl, we professionally manage diversified portfolios of high-quality Australian equities on behalf of our investors, providing them with the potential for reduced risk and steady, long-term growth.

Get in Touch With The Experts

Let us help simplify your SMSF investment decisions. We support families and high-net-worth individuals by providing access to professionally managed portfolios, helping you grow your wealth and work towards your long-term retirement objectives. Speak with our equity investment specialists today to learn how we can help support your goals.

EC Pohl & Co are a funds management firm specialising in individually managed share portfolios for sophisticated investors. We focus on sustainable, quality growth companies listed on the ASX, using in-depth research and a long-term investment approach. As a family business, we aim to redefine wealth by considering well-being, responsibility, and connection alongside financial security.

EC Pohl & Co is a funds management firm, selecting quality companies and building high-conviction long-term investment portfolios for sophisticated investors.

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