Importance Of Multi-Asset Investing

When thinking about the investment universe, one word which rises above the rest is ‘Equity’. It is an asset class which is the starting point for many investors and the foundation on which financial dreams are built. However, equity investing is always shadowed by its constant companion ‘risk’.

In an effort to reduce the risk associated with equity, investors tend to spread their investments across market capitalization. While this diversification can help reduce risk marginally, the impact on the overall portfolio remains as the inherent nature of equity is to be volatile. A better approach is to diversify investments across different asset classes such as fixed-income, commodities, REITs, InvITs etc., apart from just equities. The combination of different complementing asset classes in a portfolio results in a balance between growth and stability, helping investors to navigate various market cycles and achieve financial goals with a much lower risk attached to the portfolio.

Multi-Asset Investing
Multi-asset investing refers to investing in a mix of asset classes which comprises of equity, debt, real estate and commodities (gold or silver). The aim of this approach is to optimise returns and reduce overall risk. Consider multi-asset investing like a boat with several engines, each representing a different asset class. When one of these engines (read asset class) encounter a rough patch or stops working, the other engines keep the boat moving smoothly towards its destination. This mirrors exactly how a diversified portfolio operates, steadily advancing towards your financial goals, even when some parts of your investments may be facing challenges.

Why Multi-Asset Investing?
Different asset classes have different risk-reward ratios. Equity is most rewarding but it is like a roller coaster ride, full of ups and downs while debt allocation in a portfolio makes this journey smoother by bringing stability. Gold acts like a guard as it helps in hedging against currency depreciation and inflation. Hence, the multi-asset approach offers an optimal mix of growth, stability and risk mitigation.

Moreover, multi-asset investing also helps an investor gain from the individual strengths of all asset classes in an optimal manner. This reduces the vulnerability to the specific risks associated with a single asset class. For instance, in the last 25 calendar years, equity as an asset class has outperformed 54% of the times while debt and gold led the board 20% and 24% of the time respectively. This clearly indicates that the best performing asset class keeps on changing, making a compelling argument for portfolio diversification.

Another benefit of this approach is the negative correlation among equity, gold, and debt i.e. they often move in opposite directions. This means that when one asset class experiences an upswing, the others may tend to either stay flat or decline, thus offering a favourable outcome for the investor, irrespective of the scenario. The recent example of such an occurrence was during the onset of the pandemic. At that time, when equities faced a sharp correction, debt held firm and gold rallied, thus minimizing the overall impact of the negative development on the portfolio. As a result, over the long-term, this approach tends to yield returns but with much lower volatility.

Having said that, it is nearly impossible to predict which asset class will outperform in the future. Hence, it is important to maintain an allocation to various asset classes consistently. Often investors are drawn to the recent best performing asset classes, thereby falling victim to recency bias and herd mentality. It is crucial to understand that performance is generally cyclical and the latest high performing asset class may go into a consolidation phase after a certain point in time. By sticking to a disciplined asset allocation approach, investors can better weather the volatility storm in a single asset class and not get trapped by human bias.

Overall, multi-asset strategy aims to deliver consistent long term performance and provide stability, ensuring a smoother and more enjoyable investment experience. It is an evergreen approach that adapts well to all types of market conditions. However, each investor is distinct and has unique requirements and the individual asset allocation depends on the respective risk appetite, investment horizon and financial goal. To determine the ideal asset mix, it is important for investors to seek guidance from a domain expert and ensure the right balance between risk and reward tailored to individual needs. The other option is to opt for multi-asset allocation mutual fund. This is a type of hybrid fund wherein an investor will get access to three or more asset class within a single offering. So, as per an investor’s requirement, one can choose the approach required.

About Author:
Vinod Kumar of Perpetual Investments