An Introduction to Multi-Asset Investing

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The purpose of distributing your investments throughout several asset classes is to increase the diversification of your portfolio. The basic goal is two-fold; to generate returns while managing risk.

Different asset classes carry different levels of risk and, with them, varying levels of return according to their performance in certain market conditions. And while one asset class might outperform during a particular period, historically, no asset class will outperform during every period, which is why holding a variety of asset classes can prove to be a sensible strategy for many investors.

When it comes to choosing your asset classes, there are two types available; traditional and alternative.

Traditional Asset Classes

Equities or Shares

When you invest in an equity you are buying a share in a company listed on a stock exchange, either in the UK or elsewhere in the world. They have the potential to make you money in two ways; via capital growth as the share price increases and as an income paid in the form of dividends.With inflation running higher than interest rates in most parts of the world, the value of cash savings is constantly being eroded. Therefore, investors willing to take a long-term view of their investments could find equities an attractive choice over other asset classes.

That said, companies are not obliged to pay dividends and there is no guarantee that your share price will increase. In some circumstances, they may even fall below what you paid for them. Share prices are subject to a number of factors such as competitor behaviour, merger and acquisition activity and the economic environment to name but a few. However, over the long-term, equities have historically performed better than traditional assets classes – short-term downturns have less impact when investing for a period of ten years or more and, as a result, your investment has the opportunity to recover over time.

Bonds

Also referred to as fixed income, a bond is effectively a loan that you make to a government or company in return for a pre-determined rate of interest which is paid out at regular intervals over a specific period of time. Once the bond matures (on a set date) you are paid back your original loan amount. Bonds can also be bought and sold to investors on the stock market.

Whilst bonds generally offer lower returns than equities, they are a much lower risk, as the company is contractually obliged to pay the interest on a bond. Furthermore, if the company runs into financial trouble, bond holders rank ahead of equity holders for repayment. However, if the company defaults on their loan, the value of the bond can fall.

Cash

Cash is the most common form of investment – we put it in a bank account with a view to earning interest. However, as mentioned above, with interest rates sitting below inflation, the real value of our savings is gradually being eroded over time. With this in mind, some investors could look to cash funds instead, which use their market power to get better rates of return than you would get in an ordinary bank account. Cash funds often invest in short-term bonds known as ‘money market instruments’ which is a vehicle banks use to lend money to each other.Whilst low interest rates are causing savings values to remain low, cash still remains the safest form of investment – the government will protect up to £85,000 help in any bank account should the bank run into difficulties or go bust. You can also access cash much quicker than you can other asset classes.

Alternative Asset Classes

Property

If you own your own home, then it’s likely you may already have benefited from some growth in equity. However, when it comes to adding property to a diversified portfolio, it’s most likely you will find yourself investing in commercial property, such as offices, warehouses and/or shopping centres.Property can produce returns from either the capital growth in value or in the form of a rental income. However, due to the natural cycles of the property market alongside other external economic and political factors, property should be considered a long-term investment. It is also not ideal if you may need to extract cash quickly, as property can take time to sell and you may find yourself selling for less than you paid for it.

Private Equity

This involves investing in companies not listed on a stock exchange. They may include fledgling or start-up businesses earmarked for rapid growth or an underperforming company with the potential to be restructured and return to making a profit. Through investing in new companies, there is the potential for higher returns than with already established businesses. However, their infancy is also their biggest downside, with many new businesses failing to survive the first five years, meaning you could lose everything you invested.

Commodities

There is a huge variety of commodities that are traded on global markets and, just like shares and bonds, commodity prices rise and fall in response to supply and demand. As part of your investment portfolio, you can trade in certain items to try and generate an income. The list is extensive but can include oil and gas; precious metals such as gold and silver; industrial metals such as copper and iron; and ‘soft’ agricultural commodities such as wheat, rice, and soya.

If you would like some advice on how to diversify your portfolio, contact your Finura adviser.

Capital at risk; the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Past performance is not a guide to future performance and may not be repeated.

Sources:
https://www.investopedia.com/terms/m/multiasset_class.asp
https://www.blackrock.com/uk/individual/resources/investment-guides/understanding-investments/asset-classes-explained
https://www.fandc.com/uk/private-investors/guide-to-investing/asset-classes-explained/

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