LifeGoal Investments Blog
Multi-Asset Strategies 101: 6 Types & When to Use Them
Multi-Asset Strategies 101: 6 Types & When to Use ThemIn 2008, a financial crisis known as the Global Financial Crisis struck the world. It was one of the worst since the Great Depression of 1929.
Deregulation of the financial system is to blame for the crisis; however, it did bring about awareness of asset classes and the ability to co-mingle them, creating sub-asset classes.
Investors lost a great deal of money during the crisis, as stocks and bonds were recognized as not being able to withstand the loss experienced.
Simply put, this is one alternative for investors to diversify their investment portfolio with a greater probability of reaching retirement goals.
What is a Multi-Asset Class?Assets contain a level of economic value. When we talk about multi-asset classes, we are referring to assets such as cash, cash equivalents, equities, stocks, real estate, and bonds.
Stocks, bonds, alternatives, and cash are the four “main” asset classes. Each is managed differently.
- Stock funds are viewed by their size (small-cap, mid-cap, large-cap), sector, and location.
- Bond funds are also tailored to location but also focus on the type of currency, duration, and source of credit.
- Alternatives include assets with hedging capabilities, private equity, real estate, and infrastructure.
All of these types of assets build upon an investment or an investment strategy. The attention should not be given to just one. 10% is a benchmark to aim for, hence the introduction of a multi-asset class to further diversify a portfolio.
Why Use Multi-Asset Strategies?…because you cannot predict the market. Multi-asset creates a potentially more predictable outcome than any single asset class; it is TRUE DIVERSIFICATION!
Multi-asset strategies could help investors to reach their investment goals. They are broken into strategic assets for a passive approach and tactical assets for a more active approach.
Multi-asset strategies can be:
- Growth - prepare to achieve growth like a turtle running a race. Capital appreciation is slow-moving but worthwhile.
- Increased Income - adding to your cash flow requires you to be risk-aware while your multi-assets do their job.
- Steady - consistent returns
Another name for balanced funds is the asset allocation fund. This is partially due to the stock and bond funds morphing into multiple asset classes over a period of time.
The Benefits of Multi-asset StrategiesAs an investor, you are in the market to obtain the best return on your investment with hopes of meeting your investment goals.
Using multi-asset strategies may help by:
- Managing risk. Using more than one asset class broadens your opportunity in different industries, sectors, exposure, and more.
- Having a target-specific objective. If your target is on the return, the assets model the goal, whereas other balanced approaches are measured based on a benchmark.
- Adapting to changing market conditions.
- Being pre-packaged and ready-made.
- Providing sustainable income.
The Cons of Multi-asset StrategiesIt’s challenging to find an investment strategy that is “one-size-fits-all.” Multi-asset strategies carry drawbacks that are unfavorable to some investors. This includes:
- A negative correlation of assets. The intent of the portfolio is for all signs to point north or upward. With multi-assets, there is a chance that one may follow that trek but will offset that of another pointing south. Why is this looked at as a con? Because you are not receiving the maximum return on investment if the assets balance each other out.
- Lack of a say in the investment strategy used by a portfolio manager. This can occur when the investor does not have enough capital to invest across multi-assets they would prefer over others.
- Strategy Mismatch. This happens when you find out (sometimes the hard way – too many losses too quickly) that it’s too aggressive for your risk tolerance level, or that the strategy is so conservative that you think it may be difficult to achieve your goals.
How Many Types of Multi-Asset Strategies Are There?
- Global macro
- Targeted risk (targeted allocation)
- Target date
- Personal portfolio
- Risk tolerance
#1 | Global MacroThe global macro strategy is an actively managed strategy built to capitalize on macroeconomic and geopolitical trends. It can either be a hedge fund or a mutual fund.
This strategy monitors:
- International events and relations
- Exchange rates
- Interest rates
- Political events
Targeted risk funds mirror the investor's risk tolerance. The fund is modified based on market conditions versus age as its sister fund (target-date fund) does.
Using the targeted risk strategy may appeal to you if you prefer to have control of the level of risk assessed in your portfolio. It also is focused on the short-term versus the long-term.
#3 | Target DateThe target date strategy is built for slow growth, not to be confused with targeted risk. It uses a target date to determine the end goal, which is the year you plan to retire.
You may be familiar with target-date funds if you did or are currently making deposits into a company-sponsored 401(k) program.
If you are risk-averse, target-date funds help manage it, but not eliminate it altogether. Here’s how it works.
When the account is created, the investor remains in control. A prompt is received, asking the investor to select a fund closest to their retirement year for their investment portfolio.
Each fund is compiled with multi-assets that drive down a “glide path.” They consistently shift, chasing after low-risk options and getting more conservative as the gap between the target date is bridged.
When selecting a target-date fund, watch the verbiage used. The fund is set up to take you “to” retirement or “through” it.
#4 | Personal PortfolioNot interested in having someone manage your money for you, actively responding to an account? Welcome the personal portfolio strategy.
Investors may decide to be their own asset managers with enough capital standing by to invest. This means that they assume responsibility and design their strategy, actively managing their own account versus someone else performing the work.
Eager to build your own? Start by determining your net worth that is, how much you’ll be able to afford. That is your foundation. Then decide on how you’ll divide which asset classes you’ll invest in and how best to optimize your return.
#5 | Risk ToleranceInvestment decisions are based on historical data, trends, and forecasts. There is no defined outcome at the time the decision is made, building the risk of loss.
How would you rate your risk tolerance on a scale of 1 to 3 where:
- What is your comfort level when it comes to risk? Let this be the foundation for assessing your tolerance.
- What are your investment goals? If you are actively looking for a return within the short-term, you may teeter between conservative and moderate, working towards the ownership of liquid assets readily available for sale.
- What does your timeline look like? Do you have a few years, or can it wait for 30? The longer the journey, the more risk investors can assume and overcome.
- How old are you? That’s right - age plays a part too. It tells a piece of the story and mirrors the timeline.
- How large is your portfolio, or how large do you want it to be? The risk still exists when you have more multi-assets, but it may be more tolerable to assume.
#6 | HedgeInvestors use hedging as a strategy to mitigate loss from another investment. Think of it as a backup plan Hedging comes with its own strategies, including:
- Diversification - it’s not wise to keep all of your assets in one basket; opposites attract. Multi-asset strategies assist here as assets unrelated to one another are pooled together.
- Arbitrage - you’ll mostly see this hedging strategy with stocks. The concept is to profit on the price disparity of two identical assets that can be turned over (bought and sold or vice versa) almost immediately.
- Staying in cash - the meaning is literal. The investor contributes cash to the investment fund; Be careful of complacency here. While cash gives peace of mind, it also gives a zero return or a negative return, after inflation. That’s a risk that’s often overlooked.
Selecting the Multi-Asset Strategy Best Fit For YouBegin with assessing your risk tolerance. Once you have a comfortable level, move on to choosing what assets you want to place your capital in. What do they have to offer you in return?
Selecting the assets is next. You may need assistance from a professional, or you can select them yourself.
Once the assets are live, assess and monitor the situation. Follow the trends, and document everything! As soon as you see the scale turn, head back to the board and re-balance your portfolio.
It may just need a slight tweak or a complete re-balance of assets.
The Bottom LineUse multi-asset strategies to your advantage, striving to reach your investment goals. Familiarize yourself with the different strategies and choose the one that best fits your interests and your financial plans.
In the long run, you should strive to keep a healthy, balanced portfolio, and multi-asset strategies could help to achieve this.
LifeGoal Investments is here to help you understand the importance of investing. We are ready to help you strategically build a financial portfolio so that you can focus on today and be prepared for the future.