Every SMSF should have a plan. This plan is known as an investment strategy. It is not optional. It's not just for show, it is a legal requirement. The law mandates you have one. It's the roadmap for your fund's future. Without it, your fund is disqualified. In this article, we will show you how to develop a strategy that complies with the rules.

It Must Be Written Down

The first rule is simple. The plan must be a written one. You're not going to just have a plan in mind. You can't just discuss it with your spouse. It has to be a hardcopy.

Many trustees make this mistake. They believe they know what they are about. "Buying a house" is something they believe is a strategy. That's an action, not a strategy. A strategy is a way of stating why you are buying the house. It describes how it aids members in retiring.

This is verified by the Australian Taxation Office (ATO). When they come in and audit your fund, they ask for the paper. Without the ability to show them a piece of writing, you don't make it. You have breached the law. You must sign this document. It requires the assent of all trustees. It is the formal record of your choices.

Ideas Are Not Enough

You may have brilliant ideas about investing. You could be a stock-market junkie. You may know all about local property values. These ideas are valuable. But they are not a substitute for a legal strategy.

The law requires process. It requires proof of thought. You must document your reasons. Why did you decide to take shares rather than cash? Why were you drawn to one property instead of another? And your written strategy is your defense. It proves you acted carefully. It demonstrates that you acted for the members.

When you are at a loss, the strategy is important. It shows you followed a plan. It's a shield against any allegations of negligence. It shows that you thought about the risks before spending your money. Never rely on a vague idea. Always write it down.

Understanding Diversification

There are a few really big words in investing. It is an essential element of your plan. You'll need to spell out what you did and why, in plain language.

Diversification means spreading your risk. It's a way of not having all your eggs in one basket. If you put all your money into one company, it is a big risk. When that company goes bust, you lose everything. The risk is less as soon as you splash the money into ten companies.

Your strategy must address this. You need to decide whether you will spread your money around. You can get exposure to a wide variety of asset classes. You can hold some cash. You can hold some shares. You can hold some property. This diversifies risks across industries.

Some funds do not diversify. They can buy a larger factory. They could put all their money, 100%, into one asset. The law does not explicitly prohibit this. However, you must justify it. You have to write down why this is safe. You will need to justify your treatment of this non-diversifiedness. If you can't explain it, don't do it.

The Need for Liquidity

Liquidity is a fancy term for cash. It's a reference to how quickly you can lay hands on cash. A compliant approach also has to take into account liquidity.

Your fund has bills to pay. You have to pay the ATO levy. You also have to pay for the annual audit. You might have to pay tax. You may need to pay for coverage.

If you don't have any money free, you do have a problem. Pretend you are the owner of a $1 million building. You have $0 in the bank. A bill arrives for $2,000. You can't sell a brick of the building to pay the bill. You are "illiquid."

Your plan should accommodate this reality. It needs to make sure you have enough cash. You are going to have to make estimates of your annual costs. You must have that amount in a bank account. You can't put all your cents into an investment. You need a buffer.

Cash Flow Planning

Cash flow planning is the result of liquidity. This is particularly important for funds with older members.

Members start drawing a pension when they retire. The fund has to pay them cash each month or year. This cash will have to come from somewhere, and the strategy has to tell us where.

Does the fund earn rent? Does it earn dividends? Is this income sufficient to meet pension obligations? If not, you may be forced to sell assets. Selling assets takes time. A house cannot be sold in a day.

Your approach should be tailored to the cash requirements. So if, for example, a member has recently announced that he or she is retiring in five years time you have to do some planning. You may have to shift money from property to cash. You may have to sell shaky stock. The strategy documents this shift. It shows that you are prepared for the pension phase.

The Rules of Insurance

The provision on insurance is particularly important, of course. The law prescribes trustees to take insurance into account. This is for everyone with the fund.

You do not need to purchase insurance. The law doesn't require you to buy a policy. But it makes you think about something. You must discuss it. You have to decide whether the members need coverage.

Consider death insurance. What happens to a member's family if he dies? Do they need money? Look into Total and Permanent Disability (TPD) insurance. If a worker can't work, how will they live?

Your move needs to note that you've chosen. You could choose not to have insurance. Perhaps members have life insurance elsewhere. It's possible they already have enough assets. That is fine. You just have to write it down. And then you have to say "Insurance we looked at it and decided against because..."

When you skip this part, you break the rules. The auditor will check this. They want evidence that you had the conversation.

Reviewing Insurance Every Year

Insurance needs change. One of the younger members might get married. They might have a baby. Suddenly, they need life insurance. An older member, they might pay off their house. Their kids might leave home. Suddenly, they need less insurance.

You can't just set it and forget it. You should also read the insurance part annually. You must pay attention to see if your current decision continues to be the right one.

Consider the cost if you have insurance. Premiums go up. Is the value of the policy still good? Is it eroding retirement savings too much? Cost and benefit have to remain in balance. Document this review. Note that you revisited the wants.

Valuing Your Assets

A compliant strategy depends on actual numbers. You got to price it somewhere real. The law defines the value of assets as "market value."

The market value is what a willing buyer would pay. You did not pay for the asset 10 years ago. It's not what you think it is worth. It is the real price today.

You must do this every year. For shares, this is easy. You look up the stock market price on June 30. For cash, it is easy. You check the bank statement.

For property, it is harder. Value the house, not sell it. You don't always need an official paid appraisal. However, you need objective evidence. You can get sales of similar houses nearby. You can obtain an appraisal from a real estate agent.

The rules are tighter for collectibles, such as art or wine. You may require an independent valuer. There are special regulations for these special things.

Why Correct Values Matter

Why is value accuracy a thing? They care because it impacts everything else.

It affects your reporting. Your annual return should reflect the actual size of your fund. When we get the figure wrong, we will return it wrongly. This is a lie to the tax office.

It affects your member balances. You've got to understand how much each person is worth. When the asset values are wrong, so are the member balances.

It affects the caps. You'll be capped in how much you can place into your super. These restrictions are based around your "total superannuation balance." If you undervalue yourself, you will end up providing too much money. You could be cap violators.

It affects pensions. There are limits to the amount of tax-free money you can keep in a pension. That, in essence, is the "transfer balance cap." If the value you placed is incorrect, it's possible to go over this cap. You might pay too much tax. Or you may underestimate your tax bill and receive a penalty.

Using wrong values is risky. It distorts your strategy. It leads to bad decisions. It leads to compliance breaches. Always aim for accuracy.

Building a Simple Strategy

How to construct the document? Keep it simple. I don't want you to do a 50-page thesis, okay? You have to have a very clear, in-your-face plan.

Start with the objective. What is the goal? Typically, this is saving for retirement. Be more specific. "To generate 3% above inflation." "To build the capital over 10 years."

Next, define the risk profile. Are the members young? They might accept "High Growth." That means more shares, more exposure to risk — but also greater potential rewards. Are the members old? They might want "Conservative." More cash, less risk and safer returns.

To do that, you will need to establish the ranges for all your asset allocations. This is the practical part. Do not use fixed numbers. Use ranges.

• Cash: 0% to 100%
• Shares: 0% to 60%
• Property: 0% to 100%

Using ranges gives you flexibility. If the market changes, you don't break a strategy. Say 'Shares must be 50%' and then the market goes down, suddenly you are no longer in compliance. You're still O.K. if you say "Shares 0-60%."

Matching Goals to Members

The plan is not a matter of the trustee's ego. It's about what the members need. The members must fit the strategy.

Just look at the ages of some of the members. A fund with 25-year-olds as members is not the same as one for 75-year-olds. The 25-year-olds have time. They can lose money in a downturn. They can bide their time until the market rebounds. They want growth. The 75-year-olds run out of time. They need cash now. They can't afford to lose 20 percent of their savings. They want security.

Your strategy must reflect this. You have a member aged 75 and invest in 100% high-risk crypto-assets – you are most likely to receive a call from the ATO. They are going to question how this benefits the retirement income of the member. You need to be able to put the risk in context for that age group.

The Annual Review

You have written the document. You have signed it. You are not finished. You must review it regularly.

The law calls for a "regular review." This is at least once a year, according to most experts. You should do it before the conclusion of the financial year.

Meet with the other trustees. Read the document. Ask, "Is this still true?" "Did we stick to the plan?" "Has anything changed?"

Significant events trigger a review:

• Did a new member join?
• Did a member die?
• Did a member retire?
• Did the market crash?
• Did you sell a major asset?

Any one of these events alters the fund. And the strategy needs to be reengineered accordingly. If you die, or another member dies, the cash flow needs will be different. The profile of the risk changes if a new member enrolls.

Document the review. Write a minute. "The strategy was considered by the trustees on 25 June. We determined that it is still fitting." Sign it. File it. That's your auditor evidence.

Conclusion

Creating a compliant investment strategy is a serious task. It is the foundation of your SMSF. It protects you. It protects the members. It keeps the ATO happy.

Remember the key pillars. Write it down. Explain your diversification. Plan for liquidity. Consider insurance. Value assets correctly. Review it every year.

Do not treat this as a boring form to fill out. Treat it as a business plan. It is the business plan for your retirement. If you get it right, you build a safe and secure future. If you get it wrong, you risk your savings and face the wrath of the regulator. Take the time. Do it properly. Seek professional advice if you are unsure. Your future self will thank you.