SMSF owners run the double challenge of managing their portfolio and being entirely responsible for the outcome of their retirement savings – sometimes without a finance background. So how can a retail investor manage volatility, especially when the funds are meant for a retirement that may not be too far in the future? Self-taught retail fund investor and SMSF Investment Strategies writer Christina Bong shares her advice for investing in volatile times.

My husband and I started managing our own super investments through our self-managed super fund from September 2007, just shortly before the onset of the global financial crisis. We have seen the stock market fall 50% from October 2007 to March 2009 and then shoot up 50% from March 2009 to January 2010. Just when we thought we were safe again, the market suddenly fell 10% from January to February and recovered just as quickly from February to March.

When investing in volatile times, the first thing you can do is revisit your asset allocation.

When we first started our SMSF, considering both the trustees had no plans to retire for 10 years or more, we decided on an asset allocation based on a “growth” risk profile which was 10-30% in defensive assets and 70-90% in growth assets, like shares.

The share market was still booming at the time so naturally we wanted to put more of our funds to work in the share market. However, after all the upheavals during the past two years and based on our outlook for the next few years, we have reduced our allocation for growth assets to only 40-60%.

If you are constantly feeling worried about your super, then perhaps you have allocated too much to shares and may need to adjust your allocation to match your risk tolerance. Reducing your allocation to growth assets will lower the overall volatility of your super fund.

With current interest rates of 6% or more, cash is quite an attractive investment option at the moment. To put things in perspective, this is almost the same yield as a Greek government bond, but without any risk!

The second thing you can do is learn how to “hedge” your stock portfolio. Hedging is the strategic use of instruments in the market to offset the risk of any adverse price movements in your stocks.

There are many ways to hedge your stocks. The hedging method that we like to use for protecting our stock portfolio is to use exchange-traded options. Buying “put options” is like buying insurance for our stocks as it ensures that we can sell our stock at a predetermined price no matter what happens.

For example, we own a stock called ABC which is currently valued at $75 per share and we are worried that the price might fall. If we buy a $75 strike put option, it will ensure we can sell our shares at $75 even if ABC’s share price falls to zero.

Of course, like insurance, there is a premium to be paid and the cost of the put option will vary depending on how long you want the insurance for. If you want to learn more about hedging using put options, check out the training videos also in this week’s SuperLiving newsletter.

The third thing you can do is take another look at the types of stocks you own. Banking stocks have been popular with SMSFs because they provided good capital growth and dividends. However, they were among the stocks that were most badly affected during the GFC. Share prices tumbled and dividends were slashed.

Although the banking crisis of 2008 is considered over for now, we are watching the unfolding of possibly a new crisis with the sovereign debt problems of Dubai and Greece. We don’t know how this will play out but if there are any sovereign debt defaults, the global financial system will be affected once again.

Therefore, until we see more stability in the global financial system, we prefer to avoid holding bank stocks and currently favour holding stocks in more defensive sectors, such as consumer staples, telecommunications and health care. These stocks may not have great capital growth but they tend to hold up well in a downturn and provide good dividends. We can further boost the returns on these stocks using simple option strategies, such as the covered call strategy.

The above suggestions will definitely help reduce volatility but you may be wondering if they will also reduce the returns of your fund. Below is a table showing the rate of return of the large super funds provided by the Australian Prudential Regulation Authority, the body that regulates these funds.



Despite five years of double-digit returns, the average Rate of Return (ROR) over 10 years is only 3.4%. Using the above investment strategies, it should not be difficult to match or exceed this ROR. Our SMSF managed to achieve returns of 3.87% in FY2008 and 12.23% in FY2009. Though the ROR may not be spectacular, you can definitely sleep better at night, which is something that is quite hard to put a price on.

In summary, although we cannot control volatility in the stock market, there are at least three ways we can manage the volatility of our super funds, which are to:

1)Reduce our allocation to growth assets
2)Learn to hedge our stock portfolio
3)Reduce our exposure to volatile sectors in our stock portfolio.

If you find this article useful and would like to learn more about the investment strategies mentioned, visit our blog at http://www.smsfinvestmentstrategy.com.au/.

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