SMSF Diversification - Grow SMSF

A common question when it comes to SMSF diversification is “Does my SMSF have to be diversified?”.

The short answer is yes!

Your SMSF always must have some level of diversification with its investments, even when you want to invest 100% of your super into specific assets like property, shares or cryptocurrency.

Please note that this article should NOT be considered financial advice. We are making no recommendation for you or your SMSF to invest in any particular asset or class of assets. Any types of investments mentioned are purely for illustrative purposes only when it comes to the compliance of your SMSF and in particular the SIS regulation 4.09 (investment strategies). For investment advice specific to your circumstances, contact a licensed financial adviser.

SMSF needs cash

An SMSF needs to pay outgoings such as taxes, fees and insurance premiums. It is impractical to have an SMSF that’s 100% invested in one single asset class. Cash also provides flexibility when investment opportunities arise.


ATO SMSF diversification requirements

SMSF diversification is one of the key items that must be part of your investment strategy document. The others are:

  • Risk
  • Liquidity
  • Cash flow
  • Insurances

The regulations don’t say your SMSF must be diversified, only that the investment strategy must take into account the risk of having inadequate diversification. 

You can read the actual regulation here: SIS regulation 4.09.

The ATO has shared the following when it comes to having 100% of your SMSF invested in one asset or asset class:

“Investing the predominant share of your retirement savings in one asset or asset class can lead to concentration risk. In this situation, your investment strategy should document that you considered the risks associated with a lack of diversification. It should include how you still think the investment will meet your fund’s investment objectives including your fund’s return objectives and cash flow requirements.”

Source: What does having regard to diversification mean and can I invest all my retirement savings in one asset or asset class?

This means if your SMSF does invest everything into one single asset or type of investment such as property, shares or crypto, your investment strategy document needs to specifically show why this is appropriate for your situation.


SMSF audit requirements

In 2019 the ATO issued letters titled “​​Is your SMSF investment strategy meeting diversification requirements?” to 17,700 SMSFs. 

These SMSFs were selected because they had reported that they’d invested more than 90% of their super monies into either direct property (with an LRBA loan) or cryptocurrency. 

The 90% benchmark has been adopted by many independent SMSF auditors as a key threshold. This means if your SMSF has invested greater than 90% into one single asset or asset class (as at 30 June), the auditor will be looking very closely at your investment strategy to ensure it adequately covers the lack of diversification.

An auditor cannot tell you to change your investments or sell assets to make your SMSF more diversified. However, if the independent auditor doesn’t believe you’ve adequately met the requirement to consider diversification, they can report a contravention to the ATO.


ATO power and penalties

When a contravention report is lodged with the ATO by the auditor it increases the risk of the ATO auditing your SMSF, especially where a contravention is reported in more than one year.

If the ATO finds your SMSF has breached the regulations they can fine you an amount of $6,260 (20 penalty units). There are also other actions the ATO can take including a rectification direction (making you ‘fix’ the issue) or an education direction where you need to undertake an approved SMSF trustee education course.


Where lack of diversification may be appropriate

There may be scenarios where the SMSF investments are not diversified but this is still appropriate.

For example:

  • The member has retained monies in a diversified APRA regulated super fund meaning diversification is in place when all super assets are looked at together;
  • The member has different types of assets outside of super meaning diversification is present when super and non-super assets are looked at;
  • The member is not reliant on SMSF assets to fund their retirement meaning the risk from lack of diversification is less relevant. 

SMSF trustees need to be able to explain why their chosen investments are appropriate for their fund and how it helps them meet their financial goals.  


SMSF diversification research

Research from the University of Adelaide looked at 318,000 SMSFs across three financial years and found that adding a second, third and fourth asset class increases the median rate of return by between 1 and 3 per cent. A summary of the research can be found here.

Although the above research is not perfect and will hopefully be expanded on in the future, it does align with Modern Portfolio Theory.



Investing in a specific asset or asset class is often a trigger for setting up an SMSF. SMSFs are the only super funds that allow direct investment in assets like direct property, cryptocurrency and precious metals. 

However, SMSF diversification cannot be ignored. Even where you have a high conviction a specific investment or asset class will outperform over the long term, general wisdom states adding diversification will provide a better long term outcome for you and your SMSF.

Disclaimer: Information in this article is general in nature and is not intended to influence your decisions about investing or financial products. You should always seek your own advice from a licensed financial adviser.

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