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7 tactics to bullet-proof your DIY super

Last Updated: Tuesday, 8 April 2008

By Michael Laurence

Shaken by the 15% first quarter fall in the market? Don’t be. Just get your DIY super’s armoury up to scratch.

Australia’s smartest trustees of DIY funds always adopt straightforward strategies to bullet-proof their funds as much as possible from the impact of highly volatile bear markets.

Their central aim is to ensure that their long-term returns are maximised, despite inevitable setbacks that will hit their short-term returns along the way.

Indeed, astute fund trustees will even manage to insulate at least some of their fund’s short-term returns for 2007-08 from the worst of the recent market turmoil. And trustees with enough cash on hand will use the falling prices as a buying opportunity to boost their long-term returns.

Here are seven tips, compiled with the help of leading DIY fund advisers, for fund trustees who refuse to be shaken by the fact that the S&P/ASX200 index is down 15.5% over the first three months of the calendar year.

1. Always minimise investment costs

High funds management, investment transaction and tax costs handicap investment returns much more noticeably when markets are weak. And when markets are rocketing upwards, excessive costs prevent funds from receiving all their due returns.

Fortunately, there is a solution that works in rising and falling markets.

Many DIY super funds minimise their investment costs and maximise their market diversification (see point four) by holding their core share portfolios in some of the long-established, low-cost and highly diversified listed investment companies such as Argo Investments and Australian Foundation, or in indexed share funds that track the returns of selected market indices.

Argo Investments’ $4 billion portfolio is made up of shares in 190 listed companies, headed by BHP, Macquarie Group, Rio Tinto, Milton Corporation (another listed investment company) and National Australia Bank. These are its five biggest holdings.

Apart from these funds having low management costs, investors do not face transaction and tax costs from regularly buying and selling stocks.

2. Adopt a buy-and-hold strategy

This involves a fund buying growth assets with the intention of owning them for the very long-term if appropriate for its members’ circumstances. (Listed investment companies and index funds, discussed in point one, are often used for a buy-and-hold strategy.)

Apart from minimising, regular investment and tax costs, a golden bonus is in store if an asset is not sold until the fund is paying a pension to a retired member. Assets that are supporting the payment of a superannuation pension are no longer subject to tax, including capital gains tax (CGT) – no matter how much the asset has appreciated in value over the years. The CGT savings can be colossal.

Martin Heffron, co-principal of self-managed super fund consultancy Heffron Consulting, and Sydney superannuation and tax lawyer Robert Richards both say that while the buy-and-hold strategy can make much sense, as a general rule, fund trustees should not be motivated solely by the possible tax savings. The strategy should also make investment sense.