How Multi-Asset Investing Reduces Portfolio Risk

Investing can feel like a ride with ups and downs. But there is a way to make portfolios less susceptible to these sharp swings. Yes, it is multi-asset investing.

Diversification and Risk Reduction:

It is an investment strategy where investors invest across different asset classes, such as equities,  both domestic and international, debt and commodities like gold and silver, which results in a diversified portfolio. This strategy can significantly reduce portfolio risk and keep you on track to achieve your financial goals.

Each asset class has a role to play in the investors’ portfolio.

Generally, when you check the returns that different asset classes generated during a specific time frame, then you will see that the returns of the different asset classes will significantly vary.

For example, fixed-income investment instruments offer stable returns when the stock market is down.

By strategically allocating your investments across these different asset classes, you create a cushion against volatility.

Asset Allocation is based on risk tolerance

It is important to understand that the asset allocation should be based on your risk tolerance and investment goals because the volatility you can tolerate will depend on these factors.

For example, let us assume that you and your wife are investing in two financial goals. You are investing money for a home theatre, and your wife is investing for a wardrobe makeover.

The investment amount and time horizon are the same.

In this case, the risk you can take with your money might differ from that of your wife. If you are willing to take more risks to gain more, your asset allocation for your goal will differ from that of your wife, who may not be willing to take high risks.

So, asset allocation limits the portfolio volatility you can’t digest.

Your ideal portfolio might have a breakup between 80% in equities and 20% in debt instruments. However, your wife might want a more balanced 50-50 split.

So, in this way, asset allocation helps both of you manage volatility without compromising on returns.

Avoid knee-jerk reactions and achieve your financial goals

Generally, most of us are very emotional when it comes to money.

We might take knee-jerk reactions when the markets become volatile.

When market prices fall, we often sell our investments, fearing further losses. However, this only makes our notional loss permanent.
Asset allocation can reduce the impact on your portfolio that results from stock market volatility, by allocating to other asset classes such as equities,  both domestic and international, debt and commodities like gold and silver.

When you don’t see a big impact on your portfolio, you will be more likely to stay invested.

Also, when you redeem your investments at a loss, you not only lose money but also have a higher probability that your investment goals will be postponed. You might have to start it again or settle for a lesser goal amount.

With proper asset allocation and as your emotions are tamed, you are more likely to achieve your financial goals.

Conclusion

Multi-asset allocation is a useful investment strategy to limit volatility in investment portfolios, especially when the short term is expected to stay volatile.

Multi-asset allocation funds work under the same philosophy of asset allocation. These mutual funds invest in different asset classes based on a predetermined strategy. These funds can be a great choice for investors who want the benefits of diversification without the hassle of actively managing their portfolios.

Consult a financial planner to learn more about multi-asset allocation funds, particularly if you’re uncertain about applying these strategies to your financial situation. A professional can offer personalized advice suited to your financial goals, risk tolerance, and investment horizon.

Disclaimer

The views are personal and are not part of the Outlook Money editorial Feature.