Generally, you have a great deal of freedom when it comes to choosing your Self-Managed Superannuation Fund (SMSF) investments. You can invest in traditional investments such as term deposits, managed investment schemes, shares and gold or you can invest in items and investment vehicles that reflect your passions or hobbies.
Indeed, your SMSF portfolio may be comprised of anything that you deem suitable – including your passions – as long as it aligns with SMSF regulations, is documented within your Trust Deed and; investment strategy and meets the ‘sole purpose test’ as stipulated by the SISS Act 1993. In other words, an investment purchased for the sole purpose of providing retirement benefits to members.
Specifically, these kinds of assets cannot be leased to a related party, cannot be stored in a related party’s private residence, and must be insured in the name of the SMSF. It is therefore unfortunate that the Sidney Nolan painting that looks perfect hanging in your dining room cannot be classified as an SMSF asset.
Unfortunately, passions and hobbies don’t necessarily translate into good investments. When Trilogy Funds’ Managing Director, Philip Ryan, worked in private legal practice he once worked with a couple who invested their entire retirement fund in an ostrich farm.
“Creative for sure, but not a great investment strategy. I was working as a lawyer at the time and fortunately, I was able to negotiate to get them out of it,” says Ryan, who notes it is more common than people might think for SMSF investors to take an interest in assets others might avoid.
“I often see people who invest their superannuation in highly technical investments like foreign currencies after taking a short course in currency trading. Another common trend is people who try to use their retirement funds to create a micro property development company, despite having no experience whatsoever in the property sector,” he says.
People in this situation are often looking for significantly above-average returns.
“The downside of that strategy is the substantial risks that come with it. Cognitive bias is what really brings people undone; the tendency to focus on the potential upside of an investment and ignore the risks.”
Cognitive bias is the same reason people buy lotto tickets and fantasise about how they will spend their newfound millions, despite the odds of them winning being remote.
That’s not to say that investing in unusual assets is always wrong. These assets may reduce risk by broadening your asset allocation. Unusual assets may also have the potential to maximise returns if they react to market conditions in a different manner to your other assets. However, any investment choice should be approached with caution by anyone operating an SMSF.
There are lots of more unusual investment options for SMSF investors – vintage cars, art and wine are the usual suspects. Whatever your investment mandate, passions and hobbies, keep one eye on potential cognitive biases when making decisions that affect your retirement.