Proper multi asset investment process is crucial for building a well-diversified portfolio and achieving long term investment goals. By investing in different asset classes such as stocks, bonds, real estate, one can benefit from diversification and reduce overall portfolio risk. The key steps involve determining investment policy and risk tolerance, asset allocation, portfolio construction, execution, and monitoring. Factors like risk-return profile, costs, liquidity, time horizon etc must be evaluated for effective asset selection. Regular reviews and rebalancing are also critical. With a systematic multi asset investment process, investors can optimize risk-adjusted returns.
Develop a clear investment policy statement aligning risk appetite and constraints
The first step is creating an investment policy statement (IPS) detailing the investor’s objectives, constraints, preferences and overall guidelines. This involves analysing risk tolerance, return expectations, liquidity needs, time horizon etc. The IPS provides a framework for managing the portfolio and making investment decisions. For instance, a conservative investor may have lower risk tolerance and shorter investment horizon than an aggressive investor. The asset allocation and securities would be chosen accordingly.
Determine optimal asset allocation across different classes
Asset allocation refers to distributing capital into different asset classes like stocks, bonds, real estate etc. It is a critical decision based on expected returns and risks of each asset class. Factors like correlations, volatility, diversification benefits must be assessed. For example, a young investor can allocate more to equities for higher returns, while an older investor may prefer more fixed income allocation. Asset allocation significantly impacts portfolio returns and downside risks.
Select appropriate investment vehicles and securities within each asset class
After deciding the allocation to each asset class, suitable investment options like mutual funds, ETFs, individual stocks/bonds etc need to be identified. The choice should match risk appetite and also consider factors like costs, liquidity, fund manager skill etc. Active selection of securities can potentially provide excess returns versus passive investments. Investors must have a prudent strategy for security selection and portfolio construction.
Execute trades and construct optimal portfolio in line with asset allocation
The next step is executing the investment plan to construct an optimal portfolio per the policy statement. This involves trading securities and allocating capital across assets as per the targets set. For example, buying equity funds or stocks for the equity portion, and bonds/debt funds for the fixed income allocation. The portfolio must be adequately diversified while still meeting risk-return objectives.
Monitor portfolio periodically and rebalance to realign with asset allocation
After constructing the portfolio, performance should be monitored over time and holdings must be rebalanced. As prices change, the asset allocation can deviate from policy targets. Rebalancing trades are required to bring the proportions back in line. This discipline allows maintaining optimal allocation and risk levels. Portfolio rebalancing thus forms an important part of the overall investment process.
An effective multi asset investment process is vital for long term portfolio success and risk management. It requires carefully planning asset allocation, diversification, risk-return tradeoffs and costs. Periodic reviews and rebalancing are also needed. By following a systematic approach, investors can build optimal portfolios suited to their investment policy and risk profiles.