More than 1.1 million of us are members of a SMSF, and with close to $750 billion in retirement savings, "mum and dad" funds control nearly one third of the nation's $2.76 trillion superannuation assets.

One of the main reasons people opt for a do-it-yourself super fund is the ability to take control of their own nest egg. But - and it's a big but - strict rules apply to the way SMSFs can invest.

The Australian Tax Office regulates the SMSF sector. And it's a role it takes very seriously.

In late 2019, the ATO contacted more than 17,000 SMSFs whose records showed the fund had 90 per cent or more of its investments in just one asset or a single asset class.

The ATO's logic is that a lack of diversification - or "concentration risk" - can leave a SMSF and its members exposed to unnecessary risk if an investment fails.

The ATO is certainly onto something here.

Putting all your retirement savings into a single asset can be a high-risk strategy particularly if you don't hold other, more diverse assets outside of super. The ATO's 90 per cent single asset benchmark is particularly relevant to SMSFs that have invested in one or two rental properties using non-recourse loans.

However, risks can also apply to SMSFs that are heavily invested in cash. The fund simply may not earn sufficient returns to generate a decent retirement income for its members.

What the ATO is looking for is that fund members have made an informed decision on their SMSF's investment strategy.

That's why your SMSF needs a formal investment strategy set out in writing that explains why you believe your fund is diversified to your requirements, and that you're aware of the risks this strategy can bring. Secondly, the SMSF's assets should be invested in line with that strategy.

Your written investment strategy shouldn't be a tick-a-box document designed solely to keep the ATO at bay. It is an important tool that should be reviewed periodically so you're confident your SMSF is helping you meet your retirement goals while also satisfying the ATO's compliance requirements.

There's plenty of good, free information online for SMSF members and trustees. One tool you may find useful is a template from InvestSMART, which can help you decide if your SMSF is suitably diversified. Diversification is so cheap and simple to achieve, it makes a lot of sense to me that we spread our super risk by investing across many different asset classes.