I don't run an SMSF as yet, but if I ever do I know the first two businesses I'd buy for it.
Generally SMSF investors are later in their working lives and as such have considerable amounts of funds to invest.
According to the ATO in 2015/16 the average SMSF size was $1.1 million across 597,000 SMSFs holding $687 billion in assets.
The large size of SMSFs is also partly explained because they can be set up by couples pooling their super assets together.
So if we assume that the average SMSF investor wants to invest half their funds into shares we are talking around $600k, which is the kind of sum most investors would prefer to invest in the blue-chip end of the share market.
After all, you wouldn't want to blow up the wife's savings or your globetrotting retirement plans on a speculative pot stock at the small-cap end of the market.
Income is also likely to be a priority for anyone planning on quitting work in the near future, as once a regular pay check stops coming in you'll need something to meet monthly expenses.
But remember free cash flow pays dividends at the end of the day, so you'll need to buy companies generating growing cash flows.
You'll also want to buy companies that have very strong market positions or moats via their scale and high-class business models.
This should give your investments a 'defensive nature', but it's important to remember all equity investments carry a considerable risk of losing a lot of your capital on paper anyway.
However, the first two businesses I'd buy for my SMSF are CSL Limited (ASX: CSL) and Macquarie Group Ltd (ASX: MQG).
Both have very impressive track records and while past performance is no guide to future returns, in the case of strong businesses worldwide it is often a good indicator.
Both also offer investors overseas exposure in earning the majority of their revenues and profits in the U.S. and Europe. They also boast competitive advantages and a certain amount of pricing power thanks to their business models.
These two also have a consistent track record of dividend growth, although Macquarie's business is admittedly vulnerable to swings in capital market strength.
Liquidity also won't be a problem for your average SMSF investor, as these two businesses see heavy trading volumes every day. However, once you get to the smaller end of the share market trading a few hundred thousand dollars worth of stock can pose liquidity problems.
After buying CSL and Macquarie, I'd look to spread the risk further by building a portfolio of at least 10 quality ASX and overseas shares.
