Multi asset class investing has become an increasingly popular strategy among investors looking to build diversified portfolios. By investing across various asset classes such as stocks, bonds, real estate, and alternatives, investors can tap into multiple sources of return while reducing overall portfolio risk. This article will examine the key benefits of multi asset class investing, outline some effective approaches, and provide actionable tips for implementing this strategy.
Diversification Lowers Portfolio Risk
The core benefit of multi asset investing is diversification. By allocating capital across asset classes with low correlations, investors can significantly reduce portfolio volatility compared to investing in just one asset class like stocks. Academic research shows that a multi asset portfolio with as few as 5-10 securities can capture over 90% of the diversification benefits. Additionally, adding alternative assets like commodities and real estate can further smooth out returns.
Take a Strategic Asset Allocation Approach
Determining the optimal mix of asset classes is crucial for multi asset portfolios. A strategic asset allocation sets long-term percentage targets based on objectives, risk tolerance, and investment horizon. This method is preferred over tactical allocation which requires predicting market movements. Strategic allocation also forces a disciplined rebalancing approach to maintain target weights over time.
Use Both Passive and Active Approaches
Investors can utilize a combination of passive and active approaches when selecting investments within each asset class. Passive vehicles like index funds and ETFs offer low costs, full diversification, and efficient exposure. Active management can potentially add value in less efficient asset classes where managers have an opportunity to outperform. However, higher fees for active approaches should be weighed against any added benefit.
Rebalance Periodically to Maintain Targets
As market movements cause asset class weights to drift from their targets, periodic rebalancing is essential for multi asset portfolios. Rebalancing not only maintains diversification but forces investors to sell high and buy low. Annual or quarterly rebalancing is generally sufficient for most investors.
In summary, multi asset class investing is an effective approach to build diversified, risk-managed portfolios. Key steps include determining strategic asset allocation weights, utilizing both passive and active vehicles, and rebalancing to stay in line with targets. Following these core principles can help investors achieve their long-term investment goals.