Multi-asset investing is when an investor holds two or more different types of assets in their portfolio. Assets in a multi-asset investing strategy may include stocks, bonds, gold, real estate, or many other types of assets.
Here’s what you need to know about multi-asset investing, including some pros and cons to this diversification strategy.
What Is Multi-Asset Investing?
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 any one thing because investors could find themselves in a world of financial hurt if that one single thing loses value quickly.
However, buying stocks in different companies is just the first step in diversification. Many investors benefit from multi-asset investing, which means diversifying their investments across multiple asset classes.
The most common example of this is balancing stocks with bonds. Even though bonds are traded similarly to stocks, they’re totally different assets, and the two products have different risks and typical performance trends. By buying both stocks and bonds, an investor is practicing multi-asset investing.
How Does Multi-Asset Investing Work?
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 (including foreign currencies), real estate, commodities, precious metals—even collectibles could be considered an asset.
A truly diversified multi-asset portfolio will have a mix of many of these assets, perhaps even all of them. Any asset could outperform or underperform the others at any given time, and a well-diversified investor can handle any scenario. Having a diverse multi-asset portfolio can protect against volatility and major market swings.
It isn’t difficult to diversify across asset classes. Most brokerages offer a wide range of assets for trading. An investor doesn’t need to go out and buy a physical bar of gold, for instance, because they can simply purchase a gold-backed ETF. No matter what asset you’re hoping to add to your portfolio, there’s probably an ETF, mutual fund, or some other security that can give you that exposure.
Multi-Asset Investing Products
Investors can follow a multi-asset investing strategy on their own by diversifying their holdings as they see fit. However, investors can also let professionals handle the (sometimes tricky) task of deciding how many funds to put toward which assets. Consider these two popular multi-asset investing products:
- Target-date mutual funds: A target-date fund is a mutual fund that is designed to grow and protect the earnings based on the year in which the person expects to begin making withdrawals. They often have names containing the target year, like the Fidelity Freedom 2055 Fund. They are commonly used for retirement or college savings plans. 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. When the target date arrives, the fund focuses mostly on providing fixed income.
- Target-allocation mutual funds: Most mutual fund companies offer a selection of funds geared toward an investor’s risk tolerance. The investor picks how much risk they want to assume, and then the mutual fund diversifies their assets accordingly. Someone who doesn’t mind significant risk may end up with a stock-heavy portfolio, while someone who prioritizes safe investments may end up with a bond-heavy portfolio. Unlike target-date funds, these levels of diversification are set and won’t significantly change over the years.
Pros and Cons of Multi-Asset Investing
- Allows for gains while protecting against heavy losses
- May miss some opportunities for gains
- Higher management fees
- Diversification: Multi-asset investing is an easy way to achieve diversification and all the benefits that come with a diverse portfolio.
- Allows for gains while protecting against heavy losses: By spreading your investments across multiple assets, you can benefit from gains in all those asset classes without exposing yourself too heavily to the risks associated with those assets. One asset’s value can tank, and as long as you’re properly diversified, it won’t wipe out your entire portfolio.
- May miss some opportunities for gains: 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. Fixed-income assets, like bonds, aren’t usually designed to earn investors significant gains. Investors who can tolerate high risk in pursuit of maximum returns will likely prefer investing mostly in stocks.
- Higher management fees: Investors should be aware that the 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, as opposed to passively tracking a stock index. The time and energy that a manager spends balancing the fund’s assets translate into fees can cut into overall investment returns over time.