SMSFs battle between capital growth and income
When it comes to making investment decisions, the battle between income and growth is nothing new for SMSFs that are protecting and simultaneously trying to grow their retirement nest eggs. Here, we unpick the findings of a recent survey to see what goals SMSFs are prioritising when it comes to investment selection.
Investing is a battle between the search for capital growth on the one hand and income generating investments on the other in the eyes of self-directed superannuants, the latest AMP Capital SMSF Survey, shows.
While, overall, self-directed investors describe building a sustainable income stream as their number one investment goal, when asked about their investment intentions over the next year, their preference for growth over income is reasonably split.
One in three self-directed investors say they will be looking to increase their growth exposure over the next 12 months, while a quarter of investors say they’re looking to move into income generating investments, according to the research, which surveyed 679 SMSF trustees.
The battle between income and growth is nothing new in the minds of investors who are not only protecting but also trying to grow their retirement nest eggs.
Many investors have gone through this bull market with lots of concern. They’ve held out and as a result, more and more are holding money in cash that they would normally have invested elsewhere. However, the research shows clear shifts in their investment intentions over the next 12 months. Younger investors – below the age of 65 years – unsurprisingly account for more the largest proportion of investors who say they’re thinking about increasing their growth exposure; over 65s are more likely to be looking at moving into income generating investments.
The likelihood that a third of investors are considering growth assets more at the moment could partly be a function of the fear they may be missing out on returns as equities continue to rise despite some recent bumps along the way.
But those investing for capital growth aren’t going “all out” at the expense of risk – many are focused on balancing growth and risk, which is likely due to uncertainty in markets being the new norm.
This is reflected in the second highest investment goal of SMSFs – “achieving a balance of capital growth and managing risk”.
Key to this balance is a truly diversified portfolio. A diversified portfolio, in line with the fund’s objectives, will strike the right balance between income, growth, and risk.
What’s perhaps surprising however, is that even with good awareness of the above factors, almost half of the trustees surveyed said that they considered a portfolio invested in 20 individual stocks to be well diversified. A truly diversified portfolio should span across asset classes, not just different stocks across sectors, as this reduces the overall risk in a portfolio. When too many assets are impacted by the same market factors, they are likely to move in a similar direction in response to a market correction for example, incresing the overall risk of the portfolio. So while investors cited reducing risk in their portfolio as one of the top reasons for diversification, it's clear the way in which they achieve this is not understood.
Investors appear to be aware of their heavy skew towards equities and are gradually reducing their exposure. Direct shares still account for 27 per cent of investors’ portfolios, this is down from 33 per cent three years ago. The research shows that younger investors (<65 years old) have more exposure to managed funds and asset classes outside of equities; while the older cohort has a higher allocation to direct individual shares.
Overall, SMSF investors are striving to achieve the right balance between income and growth but are finding it increasingly difficult to do this with so many external factors at play.