What is Multi-Asset Investing?

How to achieve true diversification in your investment portfolio.

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When it comes to investing, it is common knowledge that diversification is crucial to success over the long term. It’s generally wise to avoid investing too much in one single thing, because investors could find themselves in a world of financial hurt if that one single thing loses value quickly.

All too often, however, investors will fall into a trap of diversifying only within the same asset class. For example, they may spread out their portfolio among a wide range of stocks, but avoid other kinds of investments.

For many people, it makes good financial sense to also invest in different kinds of asset classes. This type of investing is often referred to as multi-asset investing. 

There are several different ways to carry out a multi-asset investing plan. But it helps, first, to understand the various asset classes.

Stocks and bonds make up the bulk of most portfolios, but there’s also cash, real estate, commodities, precious metals, and even currencies and collectibles.

A truly diversified multi-asset portfolio will have a good mix of many or even all these, because any of them could outperform at any given time. Moreover, if one asset performs poorly, the overall portfolio can be protected by the strength of other assets. Having a diverse multi-asset portfolio can protect against volatility and major market swings.

How can an individual carry out a multi-asset investing approach? Well, they could try to build a portfolio themselves, but purchasing shares of stock, individual bonds, real estate and other assets. But it may be easier to invest in products that already have a multi-asset approach.

Here are two investment vehicles that allow an individual to invest in multiple different assets at once:

  • Target Date Mutual FundsA target date fund is a mutual fund that is designed to grow and protect the savings based on the year in which the person expects to begin making withdrawals. They often have names containing the target year, such as 2045. They are commonly used for retirement savings, but are popular in college savings plans as well. Generally speaking, a target date fund will begin aggressively with mostly stocks then gradually shift to safer and more stable investments as the target year approaches. In nearly all cases, the funds contain a mixture of stocks and bonds, and may even contain cash.
  • Target Allocation Mutual Funds – Most mutual fund companies offer a selection of funds geared toward an investor’s own tolerance for risk. A younger person with a long investment time horizon might select a fund with mostly stocks and few bonds. An older investor may seek something more bond-heavy. Fidelity is one broker offering seven different multi-asset funds that range from 85 percent equities to 20 percent equities. T. Rowe Price also offers a variety of target allocation funds, including some that mix in international equities and bonds.

    The great news for investors is that the number of choice among multi-asset funds has increased over the years. There is now a multitude of options geared toward investors of all ages and risk tolerances.

    The Cons of Multi-Asset Investing

    As we stated above, multi-asset investing can offer diversification, which can protect portfolios from volatility and major market downturns. This is important for investors who are approaching retirement age. But a multi-asset approach does have some drawbacks. For one thing, a multi-asset mutual fund will not perform as well as most stock funds in most years, because it will likely contain bonds, cash and other assets that may not earn the same returns. Those investors seeking maximum returns will likely make out better over time by investing in mostly equities.

    Non-stock assets, such as bonds, are generally not designed to make an investor a lot of money. Rather, they are used to provide a steady stream of income and/or protect an investor’s portfolio from losses. During bad times in the stock market, a multi-asset approach can be essential. But when the stock market is doing well, investors may be missing out on big gains.

    In addition, investors should be aware that target date and target allocation funds often have higher management fees than funds containing a single asset. This is because the funds are usually actively managed by a professional. These fees can cut into overall investment returns over time.