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Self-managed superannuation investors must watch their risk levels when chasing higher income returns to match persistent inflation, according to fund manager Matthew Lemke.
Mr Lemke, from Prime Value Asset Management, said SMSF investors need to do their due diligence around investment terms and conditions to ensure they’re not introducing more risk to their portfolios.
“Income investors are still in a bit of a quandary because even though interest rates are rising, they are still below inflation,” he said.
“This can create a temptation for SMSFs to pursue higher yields via income securities that are unfamiliar or more complex, and which may use leverage or hybrid investing strategies.
“That’s fine if it fits with your risk profile. But it could be a problem for SMSFs who want consistent income returns at low-to-medium risk.”
Mr Lemke said there could be a price to play for complexity if markets turn.
“Income securities vary enormously in their risk levels. It’s always good to know what’s ‘under the hood’ when investing,” he continued.
“For example, SMSFs may find certain events are triggered under certain conditions – and these events may not be well-disclosed, or may be hidden in the fine print of the offering.
“Investors could be unintentionally introducing ‘risk creep’ into a portfolio with potentially serious consequences.”
Mr Lemke said diversification has proven effective for income investing during uncertain times. “Being well diversified across many income securities builds a resilient portfolio. But it requires discipline not to try and shoot the lights out, because that road leads to more risk,” he said.
“Unfortunately, many investors are currently being lured by the return, but the other side of the equation is to look at the risks involved so the investment is then a ‘risk vs. return’ decision.”
Transparency and simplicity are virtues in uncertain times, he continued.
“We really don’t know what’s going to happen. We are in unprecedented times. Interest rates could stay high, inflation could stay high. All we can do is remain committed to a long-term, diversified approach and doing our due diligence on all investments. We know markets are cyclical and will reverse at some stage, so it’s all about managing risk and potential future change.”
Source: SMSF Adviser
21 February 2024
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