Embrace Diversified Investments for Stability and Growth
A multi-asset class, also referred to as a multiple-asset class or multi-asset fund, combines various types of assets such as cash, equity, or bonds into a single investment portfolio. By including more than one asset class, investors create a diversified group of assets tailored to their unique preferences.
How Multi-Asset Classes Enhance Your Investment Strategies
Multi-asset class investments enhance the diversification of a portfolio, distributing investments across several asset classes. This approach reduces risk (volatility) unlike holding a singular asset class, but may also moderate potential returns. A multi-asset class investor might hold bonds, stocks, cash, and real property, whereas a single-class investor might focus solely on stocks. Diversifying with multiple asset classes mitigates risk, acknowledging that no single asset class consistently outperforms.
Risk Tolerance Funds: Matching Your Investment Style
Many mutual fund companies provide asset allocation funds tailored to align with an investor’s risk tolerance, spanning from aggressive to conservative strategies. An aggressive fund may allocate a substantial portion to equities, potentially reaching 100%. For instance, the Fidelity Asset Manager 85% Fund keeps an 85% allocation in equities with the rest in fixed income and cash. Conversely, conservative funds like the Fidelity Asset Manager 20% Fund focus more on fixed income, with 20% in stocks, 50% in fixed income, and 30% in short-term money market funds.
Key Takeaways
- A multi-asset class portfolio aims to minimize downside risk by diversifying across various sectors.
- Some ETFs qualify as multi-asset class investments.
- Multi-asset class investments can evolve based on investor preferences, exemplified by target-date funds.
Tailoring Investments with Target Date Funds
Target date funds dynamically adjust their asset allocation according to the investor’s selected time horizon. Longer-term investors may choose funds targeting dates like 2045 or later, where allocations are more aggressive due to the extended investment period. These funds predominantly invest in equities. Conversely, investors nearing retirement might opt for funds maturing soon, focusing more on fixed income to reduce risk and prioritize capital preservation. This automated shift in allocation reduces investor involvement in rebalancing portfolios over time.
Benefits of Multi-Asset Class Funds
Unlike balanced funds that strive to meet or beat a benchmark, multi-asset class funds aim to achieve specific investment outcomes, such as outperforming inflation. By extending their reach across diverse investment vehicles—including stocks, bonds, real estate, and other securities—these funds are adaptable and flexible, allowing for optimized goal achievement. Their extensive diversification also surpasses typical balanced funds, concentrating on various fixed income and equity combinations. Many of these funds are actively managed, leveraging market dynamics to maximize returns and mitigate risks.
Related Terms: equity, bonds, asset allocation, ETFs, target date funds.
