No matter what you are investing in, or how complex your structures are, there’s an easy way to lift your returns, by including a simple process as part of what you do.
Using this organised process it should be possible to lift your return by 1% pa over time, which would cover the entire operating cost of your SMSF… and maybe have some left over for an extra holiday.
Imagine you are the new CEO of a large organisation. The board has given you their direction as to where they want the business to be in five years’ time. Your responsibility is to make it happen.
You are probably not going to act randomly. Instead you are likely to use a strategic management process, which would include the following steps:
- Ensure you are clear about what the vision is for the future. The goals and objectives, and the acceptable risk tolerance along the journey.
- You might then take some time to research the approaches that are available to you. What approach is the business currently using? Which approaches are other competitors using?
- You would then make an informed decision about which approach you think is most likely to meet your objectives at an acceptable level of risk, and you would implement that approach.
- It doesn’t stop there. You would then benchmark how your current approach is going. This involves both “Internal benchmarking” against your own objectives and “External benchmarking” against competitors. Is there a competitor who is consistently getting better results? If so, what are they doing that you may be able to adopt in your business?
- You would then regularly review your current approach. Have there been any changes to your business objectives. Based on the benchmarking information, should you continue with your current approach, modify it a little bit, or perhaps adopt a new approach?
Benchmarking is simply part of a management process. Many successful organisations, sporting teams and government departments benchmark their performance to improve.
Richard Thaler won a Nobel Prize in economics for introducing the concept of “A Nudge”. The concept is that sometimes just a small change in a process can make a huge difference to outcomes.
My small nudge is that whether you are just starting out with an SMSF or a sophisticated investor with complex structures in place, why not borrow from business, and include our “Strategic Investment Management Process” as part of managing your fund for performance.
Over the course of the next few weeks we’ll discuss various elements of our process, getting back to basics, and perhaps challenge your beliefs on certain aspects of investment performance measurement and benchmarking.
Nick Shugg is the chief executive of SMSF Benchmarks, an on-line service designed to give SMSF trustees better information about how their fund is going. He has worked in the finance industry for 30 years, including as an adviser for 19 of these years.