About 50% of all SMSFs have more than half of their portfolio invested in one asset class, despite more than 80% recognising the importance of diversification.
New research from the SMSF Association and Investment Trends shows 47% of SMSFs allocated more than 50% of their portfolio to one investment type.
Further, 82% of SMSFs surveyed said diversification is important, though 53% cited barriers to achieving diversification.
There is a concerning gap between knowledge and action amongst SMSFs regarding diversification, the SMSF Association said. Such a gap could likely be narrowed if SMSFs were to engage in financial advice more, with only one in five currently doing so.
However, the biggest challenge SMSF investors see themselves facing is regulatory uncertainty.
"The imposition last year of the $1.6 million transfer balance cap once again moved the superannuation goal posts and the recently proposed changes by the Australian Labor Party to remove franking credit refunds could result in a significant reduction in retirement income for many Australians, particularly those with SMSFs," the association said.
The report shows that 60% of SMSF investors aged 65 or older plan to invest in blue chip shares over the coming 12 months; shares that usually generate strong yields from franking credits.
The removal or imposition of limits on refundable franking credits would turn the world of many self-funded retirees upside down, the association said.
SMSF Association chief executive John Maroney said regulatory instability will always be difficult to navigate but specialist SMSF advice can help.
"There really should be no barriers today for SMSFs to be run cost-effectively and to mitigate against market and regulatory volatility. The right assistance and tools can bridge the gap in the SMSF sector between a strong understanding of the need for true diversification and the ability to achieve it," Maroney said.
The research comes as part of the inaugural SMSF Week aimed at addressing the major issues facing the sector, including the argument that SMSFs are not suitable or effective if the balance is less than $1 million.
The association said its own research shows "SMSFs can be appropriate and cost effective well below this amount depending on the trustee's individual circumstances. The key to success is the right assistance from the start, not when you hit a certain number."
The argument was made in the Productivity Commission's draft report which stated SMSFs with less than $1 million perform significantly worse than institutional funds as a result of materially higher costs when compared to APRA-regulated funds. They have also delivered materially lower average returns than SMSFs with balances over $1 million, the report said.