Few people will view risk – be it to their health or investments – through the same lens again for a long time, if ever.

Rewind to the early days of a bright new year in January.

The notion of a global pandemic that would kill almost 280,000 people and shut down the world economy would have belonged firmly in the realm of Hollywood disaster movies, rather than something you or your super fund had reason to worry about.

Liquidity is one thing that investors take for granted, particularly after an extended period of strong markets growth and, in Australia’s case, no economic recession for 29 years.

However, times of severe market disruption and turmoil effectively stress-test investment portfolios and superannuation, as well as their need for liquidity.

Large super funds have been part of the debate on liquidity, in part because of their need to rebalance portfolios affected by the share market’s drop, as well as a financial hardship support package initiated by the federal government that includes early release of retirement funds.

But it’s not just the fund titans that are rethinking their approach.

Self-Managed Super Funds (SMSF) are also finding they need to focus more on liquidity – particularly when members are approaching or are already in the drawdown, or pension phase.

Super is a long-term investment. So, liquidity can often be traded off when the funds will not be needed to be drawn down for 30 or 40 years.

For SMSF trustees in their 30s or 40s, liquidity is more an opportunity than a risk.

However, for those in retirement the situation shifts. The purpose of super becomes to provide income to fund or supplement your lifestyle once the regular pay-cheque has stopped.

How you manage your SMSF’s liquidity becomes critical at this time because it is your responsibility as a trustee to be able to pay expenses of the fund and benefits to members, as required.

The liquidity challenge for SMSFs invested predominantly in one illiquid asset, such as property, can be dramatic when things do not go to plan.

There are significant risks for those with concentrated direct property portfolios.

Last year, the Australian Tax Office quizzed more than 18,000 SMSF trustees about the diversification of fund portfolios. The letter was sent to trustees that had more than 90 per cent of their SMSF assets in a single asset class – typically property.

The ATO was not saying that you could not invest in just one asset class – it just wanted trustees to be sure they understood the risks – particularly if limited recourse borrowing was involved – on return, volatility and liquidity and a properly considered investment strategy.

At the time, there was discussion around whether it was a proper role for the ATO to ask such a question.

However, for trustees that heeded the warning about the risks of lack of diversification and the potential liquidity risk, it was prescient indeed.

Written by Robin Bowerman, head of corporate affairs at Vanguard Australia.