Using a platform like Clarity to invest your way in local and global stock markets is an exciting and interesting way to grow your wealth, but putting all your eggs in the stock market basket is not always the ideal approach.
One strategy that appeals to risk-averse and growth-oriented DIY investors is multi-asset class investing — a method that blends different types of investments to build a more diversified, resilient portfolio.
These asset types typically include stocks, bonds (fixed-income), real estate (either directly or via Real Estate Investment Trusts), physical commodities like gold, and cash or cash equivalents such as money market funds or treasury bills.
DIY investors can add additional diversification benefits and more aggressive or longer-term return profiles by including alternative investments, such as crypto, private equity, and hedge funds.
Why Multi-Asset Strategies Make Cents
The idea behind multi-asset class investing is simple: each asset class behaves differently under various economic conditions. It basically boils down to sensible risk management.
If your portfolio has a dominant or complete tilt towards stocks, a market downturn could significantly erode your wealth.
However, with multi-asset investing, when one area of the market struggles, another may be thriving. This balance can help smooth out return profiles over time and reduce the impact of market volatility on returns. However, this means this strategy can also reduce overall returns.
Combining different assets in a portfolio can also create a flexible and nimble portfolio, which can help DIY investors achieve various investment objectives.
Key advantages of multi-asset investing include:
- Reduced volatility: Different asset classes react differently to market events.
- Improved risk-adjusted returns: Balance potential gains with stability.
- Flexibility: Adjust allocations as markets, economies, and your personal goals evolve.
Approaches to Multi-Asset Class Investing
There are various ways to implement this strategy. Clarity, by Investec allows investors to tap into a range of local and global exchange-traded funds (ETFs).
These low-cost index-tracking funds offer diversified options across asset types, including exposure to traditional assets like bonds via the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD-NASQ).
Another option for DIY investors that offers baked-in diversification is a multi-asset fund, such as a balanced fund. These professionally managed funds invest in multiple asset classes, typically stocks for growth and bonds for stability and income, into a single portfolio.
Constructing DIY portfolios also allows investors to express their personal flair, but it is always advisable to get help from a financial adviser if you are allocating a significant portion of your personal assets to this portfolio and not just your discretionary investment.
Rebalancing the Equation
For decades, the 60/40 portfolio (roughly 60% equities, 40% bonds) was the default allocation for a multi-asset investment strategy, as stocks and bonds tended to move in opposite directions (known as a negative correlation) – when stocks rose, bonds fell and vice versa.
However, this traditional approach has shifted in recent years as market dynamics have changed and the alternative market has exploded, offering additional options.
Investors today often structure multi-asset portfolios with a 50/30/20 or 60/20/20 ratio of stocks to bonds and alternatives.
The aim is to add return sources less tied to traditional stock/bond cycles and more resilient to inflation shocks.
The investment strategy that works well for one investor may not be the best fit for another. As with any investment decision, it’s important to first understand your goals and then identify the ideal investment strategy to get there.
Is Multi-Asset Class Investing Right for You?
Whichever asset allocation you choose, multi-asset class investing is generally a smart way to build a portfolio that can weather different market cycles, protect your capital, generate income, and still offer opportunities for growth.
By blending the strengths of various asset types, you can aim for steady progress toward your financial goals without being overly exposed to the fortunes of a single market. It’s not about eliminating risk, but about managing it intelligently.
