The strong Australian economy, low interest rates and one of the highest dividend yields in the developed world means that SMSF investors should be rethinking on-going high allocation to cash by diversifying into an equity strategy designed to meet the financial needs of retirees.
"Traditionally, superannuation and investment funds in Australia have focused on the accumulation phase of retirement savings. However, once investors retire they need an income solution that will help cushion retirement savings from market volatility and grow above inflation to preserve lifestyle preferences," said Legg Mason Australian Equities chief investment officer Reece Birtles.
The false belief in ‘safe cash’ is posing a major risk to SMSFs, according to Legg Mason. SMSF holdings in cash and fixed income products stand at 30% according to ATO estimates and this figure has been steadily growing since 2007. Legg Mason believes the flight to ‘safe cash’ might be misleading; while they may be 'safe' from the exposure to equity investment risks, SMSF investors risk having no protection from inflation and falling income if they have large sums invested in cash.
A different approach is required for your clients seeking retirement income. Rather than dialling down the equity investment, retirees require an exposure of more than 50% to growth assets including equities to keep up with an inflation rate of 2.5% over 20 years, says to Legg Mason.
Birtles says a key reason why investors and SMSF trustees overlook equity markets is due to a risk hangover in investor psychology from the global financial crisis.
"Investors are spooked by the split personality of equity markets. On the one hand retirees should be embracing equities because of Australia's strong corporations, high dividend yields and favourable tax structure; on the other hand they are shunning it because they are reminded of the complicated derivatives and products that contributed to the financial crisis," Birtles says.