If you want to protect your money from the vagaries of uncertain markets, you must learn about asset allocation
Let’s say you had invested all your money in equities in 2000 and remained invested till 2007. Your money would have grown four-fold by the end of 2007 and you would have reaped bumper gains. If you had invested all your money in fixed deposits or debts, your money would have less than doubled in seven years.
Now imagine that you invested all your money in the second half of 2007 in equities. Your money would have given almost zero return still 2015. Had you invested all the money in fixed deposits or debts, you would have again less than doubled.
While the first scenario is profitable, the second is loss making purely from the equity point of view. This is why investing in multiple assets is important. Investing in multiple assets is known as asset allocation, which is the key to managing risk and building wealth.
Investment choices for investors
As explained earlier, asset allocation is important so that any adverse market condition in one asset class doesn’t impact your total investment adversely. At a high level, investing offers two types of assets. The first is where the returns are not fixed, while the second type is where the returns are fixed.
The first category consists of equities, gold, land, while the second category consists of bonds, fixed deposits, government securities, post office deposits, etc. In this article, we will mainly focus on equity in first type and any of the fixed income securities in the second type.
Asset allocation: a function of risk and investment horizon
Asset allocation depends on your investment horizon as well as your risk appetite. Let’s look at each separately.
Risk appetite: Risk in investment simply means the uncertainty of returns. Equities come under highly risky investment category because the returns are uncertain. In some years, equities can give as much as 50 per cent returns, while in some years the losses can be equally staggering. This is what makes equities risky. In contrast, government bonds, high grade corporate bonds, and fixed deposit schemes can give 7-9 per cent every year depending upon prevailing interest rate. Hence these are called less risky investments but offer low yields.
Investors who have high risk appetite invest a larger part in equities and a smaller part in bonds, while investors with low appetite for risk do the reverse.
Investment horizon
Asset allocation also depends on the investment horizon of the investor. Equities or high risk investments are subject to market fluctuations and hence tend to move either ways in short term. Hence investors with short term target should not go for equities.
Suppose an investor has Rs 10 lakh now and wants to buy a home in the next three years. He wants to put this money into an investment. This means his investment horizon is three years and he will need this money after three years when he goes to shop for a home. While he might be tempted to put all in equities hoping to double the money in next three years, this may backfire. His best strategy would be to put the money in fixed deposits, bonds or bond funds. If at all his risk appetite is high, he may go for balanced funds which invest partly in equities and partly in bonds.
However, if an investor is building wealth for his reti-rement, he can go for investing major part in equities.
Investment horizon is directly linked with the current age of investors. An investor in his 20s or 30s has more years to invest and hence can take risk by investing major part in equities, while an investor in his 40s and 50s cannot invest the same proportion in equities.
A thumb of rule is to subtract your age from 100 and invest that percentage in equities and rest in debt. If you are above 60, do not go for equities unless you have more money than you need for the rest of your life.
How to invest in different assets under asset allocation
Now that you have fair idea about asset allocation, let’s see how you can implement the asset allocation strategies in your case.
Investing in equities can be done in two ways; either by investing directly in stocks or by investing in equity mutual funds. Investing directly in stocks is not advisable unless you can study companies’ financials and understand few economic terms and their impact.
Investing through mutual funds is the best way for common investors to invest in equity market. Mutual funds invest in a set of companies and run by expert fund managers. You can start an SIP (Systematic Investment Plan) to invest in mutual funds.
Investing in fixed income:
Fixed income products include bank deposit, corporate bonds, government securities and schemes such as annuities, and infrastructure bond funds. All these investments are risk-free or of very low risk. The-re are also mutual funds known as balanced funds and bond funds. Balanced funds invest in equities and bonds while bond funds invest in bonds only.
Key Points for investors
In many cases, investors tend to ignore the importance of asset allocation and investment horizon and are prone to knee-jerk reaction by investing their entire amount in equities during an irrational bull market or all in bonds in an overly pessimistic bear market. Follow your risk appetite and investment horizon strictly to form a portfolio and build wealth over time. At the same time, as your investment grows and your investment horizon changes, you should revisit your portfolio and change the composition of equity and debt if required.
As far as investing in equities are concerned, do not invest unless your investment horizon is at least five years. Equities fluctuate widely in the short-term while they tend to give good returns in longer term. Take decisions based on your investment horizon, knowledge, and risk appetite.
Finally, despite the rules, asset allocation is a subjective concept. What is risky for one may not be risky for others. For example, a person who has fair idea about stock market will invest in equities even at the age of 50. Similarly, a person with low risk may invest a major part in bonds irrespective of his or her age.
Source - asianage.com
A portfolio is a combination of different stocks from the different sectors. Investing can help investors take advantage of compounding returns and grow the investment amount.
The composition of investments in a portfolio depends on a number of factors such as investor's risk tolerance, investment horizon and amount invested.
Diversification:
Diversification is one of the basic building blocks of a good portfolio. Diversification reduces risk by allocating investments. It aims to maximize return by investing in different areas that would each react differently to the same event. Diversification can help an investor manage risk and reduce the volatility of stock price movements.
A portfolio is a combination of different stocks from the different sectors. Investing can help investors take advantage of compounding returns and grow the investment amount.
The composition of investments in a portfolio depends on a number of factors such as investor's risk tolerance, investment horizon and amount invested.
Asset Allocation:
Asset Allocation is the most important factor in determining the expected long-term performance and return variability of a well-diversified portfolio. In other words, the asset allocation plays a key role in determining portfolio's overall risk and return.
Risk & Return Analysis:
All investments involve some risk, even seemingly "safe" investments. Investors should consider risk taking ability and willingness before committing fund to portfolio because not every asset is suitable for every investor.
Do proper research and avoid information cramming:
Research is a backbone of every investing. Research assists the decision-making process with as much relevant information. One can use top down approach or bottom up approach. Research on companies helps investors understand the health of its business and its future prospects.
Among the quantitative factors, five factors to select stock are Earnings, Profit Margins, Return on Equity (ROE), Price-to-Earnings (P/E) and Price-to-Book (P/B).
Hold some portion in cash:
A well-balanced portfolio should have some space for cash to maintain liquidity in the portfolio. Liquidity will help rebalance the portfolio in case of market movements. Rebalancing would help the investors earn better returns.
To conclude, a well-balanced portfolio helps investors earn maximum returns.
By James Saft Reuters
Concentrate on savings when you are young, but worry more about making the right asset allocation as you get closer to retirement.
That’s the finding of a new paper from investment firm Research Associates looking at retirement plans.
Broadly speaking, there are two principal ways to amass a capital sum:
- one is to put money aside,
- the other to invest it cleverly.
Alas, far more ink, effort and blood is spilled trying to beat the market than in trying to get people to simply save early and often.
There are many reasons for this. For one, it is easier to sell outperformance, which gives the illusion of a tactic which is self-funding. It’s much harder to sit down with a client and tell them that their savings are insufficient for their needs than to soft-soap them with the prospect of effortless and sacrifice-less gain.
None of this makes asset allocation unimportant; it only implies that it often gets attention which would better be spent elsewhere. Indeed, the authors suggest, sometimes the usual strategy of taking on more risk early and less late can have unintended and negative consequences.
The study looked at target date funds, the default option in many defined contribution retirement plans.
TDFs make asset allocation choices in an attempt to maximize gains by some specific date, often the desired retirement date of the saver.
While not all TDFs are the same, they will tend to hold more equity during earlier periods, on the theory that the saver has time to bounce back from market corrections. As the target date nears, these funds often allocate more to “safer” assets such as bonds.
But running millions of simulations on different scenarios indicated a different approach may work better.
“Our quantitative results confirm that contributions matter more than allocations early in life cycle investing,” said Jason C. Hsu, Jonathan Treussard, Vivek Viswanathan and Lillian Wu of Research Associates.
“Asset allocation decisions in the first 20 years of a TDF scheme have no appreciable impact on the ending account balance. And it takes unreasonably high allocations to risky asset classes to make up for low initial contributions.”
But in later stages approaching the target date, or retirement, investment returns, and hence asset allocations, are the “primary determinant” of final portfolio values, according to the study.
FEAR AND GREED
Some of this is just common sense. Contribute $5,000 to the $10,000 401(k) account of a 27-year-old and, presto, a 50 percent advance. Put the same $5,000 in two decades later when the account has grown to $220,000 and you get only a 2.3 percent gain.
In the same respect a higher market return from that $450,000 is far more meaningful than a big year when balances are low early on.
This leads the authors to argue for some unusual tactics. Besides the importance of preaching saving to young plan members, they also acknowledge that the usual equity-heavy allocations in many early-stage TDF plans can backfire.
Earlier studies have shown that investors’ contribution rates are affected by losses, even though a fall in the market logically implies that the next dollar is a better long-term investment than the one previous to it. A saver who lives through a bear market early in her career might shy away from making contributions. The reverse may also hold true: Equity gains in early years could give savers a false idea of what their long-term returns will be. That can lead to pension contribution “holidays” with terrible long-term consequences. Catch a few years of 15 percent returns, and you will be tempted to take a vacation, both from contributions and to the beach, next year.
Therefore it might be a good idea, from a behavioral point of view, for plans to have a lower equity weighting early on. The gains from a bull market early on will matter less than a bull market in a saver’s 50s, and the chances of the saver turning away from the 401(k) or from riskier assets will be less.
None of this presupposes what the best allocation in the years nearing retirement might be. Allocations inevitably involve trade-offs between hoped-for returns and feared volatility. In theory return chasing won’t be any more successful for a 55-year-old than it usually is for the young and feckless.
Still, the older saver should, on balance, spend more time, money and energy on asset allocation. In the same way, wealth advisers who encourage clients to save early, even if they take fewer risks then and generate less in fees, provide the best service.
Source- stltoday.com
A structured product (SP) is essentially a portfolio-restructuring tool. It is a platform of fixed-income and derivative instruments, similar to a mutual fund.
A structured product (SP) is essentially a portfolio-restructuring tool. It is a platform of fixed-income and derivative instruments, similar to a mutual fund. Its layer of derivatives gives it the flexibility needed to blend with a portfolio and enhance its risk-to-return performance while matching an investor’s objectives. High-risk, high-reward SPs can form a part of equity while its lower risk designs can be plugged into debt.
Nifty-linked debentures are constructed to meet investors’ desired returns by taking a little market risk. By virtue of their structure, such products have in the past outstripped the benchmark by a generous margin. They are one of the few asset categories that generate a sizeable alpha, or returns over and above the Nifty.
In terms of cost, it is a reasonably charged instrument that attracts a one-time charge of 0.5-3% against the 2% management fees charged annually by a mutual fund or even insurance that attracts around 1.25% per annum. Are they suitable for retail investors?
SPs are suitable for you if you are:
- Looking for a product that complements and enhances performance of the current portfolio;
- Looking at diversifying market risk in the true sense (unlike investing in multiple equity MFs that depend on upward market movement);
- Looking for strong returns over an approximately three-year investment horizon; and
- Comfortable with a minimum ticket size of USD30,000 and are willing to take a credit risk.
Types of investors
They come in low- to high-risk varieties, for all kinds of investor requirements and appetites. These products are particularly popular among HNIs and corporate bodies due to their large ticket size and strong returns, coupled with a three-year investment span.
Like any financial instrument, these too have their risk-reward payoffs. So, adventurous investors tend to gravitate towards non-principal protected varieties while conservative ones look for complete principal protection. But, historically, considering three-year average rolling returns, the Nifty has never dropped below 20% in the past decade.
So, as far as risk is concerned, providing partial protection of up to a 15-20% fall in the Nifty could be a safe bet even for conservative investors. However, product-based investment styles seldom make good returns for the portfolio as a whole. For best results, it is important to design a suitable strategy with the help of a product expert. A well-designed strategy utilises SPs in different combinations, which can help an investor reap benefits across market seasons — capture bull runs or generate benefits in dull and negative market scenarios.
Risks Involved
Interest and faith in this asset category is escalating with the current SP market at R10,000 crore, and growing. Since its inception in India in 2005, there has not been a single default or delay by any issuer till date. Yet, one must pay close attention to the not-so-obvious risks associated with this product.
An important factor that investors should consider is the degree of transparency offered by service providers with respect to the investment. Considering this varies from one wealth service provider to another, it may be prudent to consult one’s wealth manager and select a service provider according to one’s comfort and need for transparency.
Investors tend to fall for ratings while conveniently ignoring the issuer’s true credibility. Ratings, which are measured on the basis of a fixed set of parameters, often reflect the risk perceived by an investor rather than the actual risk one may be subject to. The actual risk depends on an issuer’s competence and expertise. It is, therefore, necessary to pick an issuer with a strong background and superior product designing skills.
Simply Put
Since their inception in India in 2005, there has not been a single default or delay by any structured product (SP) issuer till date.
An important factor that investors should consider while buying an SP is the degree of transparency offered by the service provider with respect to the investment. It may be prudent to consult one’s wealth manager on this.
Investors tend to fall for ratings while ignoring the issuer’s true credibility. The actual risk depends on an issuer’s competence and expertise. Pick an issuer with a strong background.
Source - financialexpress.com
Smart money management isn’t only about paying bills, prioritizing spending and saving. It’s also about investing and growing your money. But investing can be intimidating if you don’t understand your options. Traditional investments — such as stocks, bonds and mutual funds — are excellent if you’re just getting started. But as you become a more savvy investor, you might widen out and explore different types of alternative investments.
What Is an Alternative Investment?
An alternative investment is any investment that doesn’t fall in the realm “traditional” securities such as stocks, bonds or mutual funds. Whether you have a little or a lot to invest, there’s an alternative investment within your reach.
These investments are worth consideration if you want to diversify your portfolio and achieve higher returns. However, alternative investments aren’t for everyone. Due to the diversity of investments available, as well as the nuances and regulations associated with each, it’s important you understand the market well before putting any money into it.
Here are 13 types of alternative investments you might be interested in exploring:
Types of Alternative Investments
1. Real Estate
Investing in commercial or residential real estate can be profitable as a short-term or long-term investment strategy. You can purchase properties below market value, renovate and then sell these properties for an immediate profit. Or you can purchase rental properties and earn consistent monthly income from your tenants.
The downside is real estate investing generally requires a large initial investment. Sure, you can get a bank loan to cover the purchase price, but you’re responsible for other costs associated with buying a property like down payments and closing costs. Additionally, you’ll need cash to maintain and fix up properties you’re flipping or renting.
There is, however, good news. Real estate investment trusts can reduce the amount you need to start investing. As a real estate investor you can take advantage of tax deductions to reduce your tax liability and keep more of your profits. And since real estate tends to appreciate over time, the equity you gain from buying and holding real estate can be a powerful asset when you’re ready to retire.
2. Hedge Funds
If you’re a seasoned investor with plenty of cash, you can diversify your portfolio by investing in hedge funds. This investment strategy works similar to a mutual fund, in that you’ll pool your cash with other investors to invest in securities and other instruments.
Hedge funds have a manager who oversees the fund and chooses the best investment strategy. Hedge funds have a more aggressive investment approach, which often means higher returns on your investment. Unfortunately, hedge funds are only for wealthy investors.
This type of investment typically requires a minimum investment of $1 million, and Robert Johnson, CEO of the American College of Financial Services, said that high fees are a common characteristic of hedge funds.
“The standard hedge fund fee structure is 2 percent of assets for asset management,” he said. “In addition, hedge fund managers take 20 percent of investment profits.”
3. Peer-to-Peer Loans
Peer-to-peer lending is an alternative to traditional bank loans. Borrowers can often receive money from private investors at a lower rate. And as an investor, you can lend money to complete strangers and earn interest on the loan.
You don’t need a lot of cash to get started. Some P2P lending sites only require investors to make minimum loan amounts of $25 per note.
Unfortunately, there’s always the risk of borrowers defaulting on their loans. Since these are no-collateral loans, there’s no security to protect your investment. However, you can reduce your risk by only lending to high-rated borrowers — and only lending what you can afford to lose. Peer-to-peer lending sites like Prosper and Lending Club rate borrowers based on their credit history.
4. Venture Capital
As a venture capitalist, you can get in on the ground floor of a startup or help a small business expand. Business owners who can’t qualify for traditional financing might seek funds from a venture capitalist, which can be for thousands or millions of dollars.
But you shouldn’t invest in any random company. Make sure you believe in the company’s business plan. Investors can receive ownership in the company, resulting in potentially huge returns if the company succeeds. They can also receive high rates from the borrowers.
5. Comic Books
With the success of movies like “The Amazing Spider-Man,” “The Avengers” and more, it’s no surprise that comic books are growing in popularity. If you have a passion for comic books, this might be the perfect investment to add to your portfolio.
Comic book investing doesn’t require a lot of cash to get started. “There’s a comic for every budget and a budget for every comic book,” said Vincent Zurzolo, co-owner of New York-based Metropolis Collectibles, a vintage comic book dealership. “You can spend anywhere from $10 to $2 million.”
Of course, there’s no guarantee a comic book will sell for huge profits. It’s all about demand and timing. You have to know what’s popular among collectors. And it really depends on whether you’re looking for a short-term or a long-term investment.
Zurzolo said that buying pre-1985 comic books is best for long-term appreciation. “Long-term investors should pick comics that have slow and steady growth,” he said, “whereas short-term investors may want to buy books starting to get hot with the intention of selling them quickly before they get cold.”
6. Franchising
Maybe you like the idea of owning a business, but you don’t want to start a company from scratch. If you buy a franchise, you don’t have to.
The benefits of buying into a franchise include “name recognition, quick cash flow, ease of obtaining financing (to expand or start), and an established turn-key operation (convenience for purchasing supplies, equipment, etc.),” said Carlos Dias Jr., a financial advisor with Excel Tax and Wealth Group.
Of course, buying a franchise means you might have very little say in how the business runs. Also, buying a franchise isn’t cheap. You might spend several hundred thousand dollars or millions to get started, and you might be required to put up some of your own cash. In addition to startup fees, monthly franchise fees can go as high as 12 percent of gross sales for a chain restaurant, for example.
7. Wine
Wine investing is another alternative strategy for growing your money. Fine wine gets better with age. So a rare, vintage bottle might be worth big bucks to a serious wine collector one day.
Some investors purchase cases of vintage wine with the intent of selling bottles for profit in the future — typically at a wine auction. But since wine is a tangible investment, storage can become an issue. Fortunately, there’s a way around this.
“Wine funds have developed for those individuals who believe that they don’t have the expertise to select the proper vintages or the capability to store the wines,” said Johnson.
Wine funds let investors buy shares in a wine company and earn dividends on their investments. The initial investment varies, but according to Food and Wine, “it can be as little as $20,000, though $50,000 is closer to the norm.” Wine investors should also anticipate fees, about 2 percent of assets under management and 20 percent of fund profits.
8. Art
If you know how to identify fine art and you’re looking to make a long-term investment, you can buy now and sell for a profit in the future. To help you appreciate the earning potential of art, sales of postwar and contemporary art “have ballooned from $260 million in 1995 to $7.8 billion last year,” according to Bloomberg Business.
9. Annuities
If you’re looking for an alternative investment strategy with retirement benefits, consider an annuity — a type of insurance product. The concept behind an annuity is simple. You make an investment in the annuity and then receive regular distributions either immediately or starting sometime in the future. An annuity can be your sole retirement plan, or it can supplement an IRA or a 401(k).
According to CNN Money, annuities are beneficial because invested funds are tax-deferred, and since there’s no annual contribution limit, you can add as much money as you like. Fees should be top of mind, however. CNN Money reports variable annuities have high annual fees; it’s possible to pay up to 2 to 3 percent a year. Withdrawing from your annuity before you reach 59 1/2 could result in a 10 percent early withdrawal fee.
10. Collectible Coins
Collectible coins can be an excellent way to get a fairly decent return on your money in a relatively short time — about a 25 percent return in less than 12 months is common, said experienced coin collector Josh Brooks. The key, however, is knowing the best types of investment coins.
“Stick to graded coins, encapsulated by a reputable coin grading service (PCGS, NGC or ANACS), and avoid ungraded coins as they are too tricky for the novice,” said Brooks. As far as specific coins, Brooks recommends Morgan silver dollars, Peace silver dollars and Franklin half dollars. These are the most popular, most liquid coins, and they can be purchased for less than $100.
Brooks buys and sells on eBay. “The trick is to buy sets either at auction or by negotiating directly with the seller, break the set up, and sell the individual coins.”
11. Tax Lien Certificates
Investing in tax lien certificates is another alternative investment strategy to diversify your portfolio. After a municipality or county puts a lien on a person’s house for non-payment of property taxes, the government might sell the tax lien certificate to an investor at auction.
The winning bidder pays the full amount of the lien to receive a tax lien certificate, which is a claim on the property. Getting a tax lien certificate doesn’t mean the investor owns the property. The owner of the property will pay the amount of the lien, and the investor receives the payment plus interest. If the owner doesn’t pay within this allotted time, the investor can foreclose and, in many states, get the property free and clear, which he can then sell for a profit.
Tax lien certificates carry risks. The property might be located in a bad part of town or require a lot of repairs, at which time you could end up with a property of little value. Or you might discover the property has additional liens, which will make getting the title difficult.
12. Forex
Forex, or the foreign exchange, is the buying and selling of different currencies. It might be the largest financial market in the world, but it doesn’t take a lot of capital to get started with a Forex broker. For example, Forex.com only requires a minimum initial deposit of $250.
As a global market, Forex never sleeps, so there’s the opportunity to invest around the clock. Forex investing is extremely fast and volatile.
13. Whole Life Policy
A whole life insurance policy can do more than provide your beneficiaries with financial support if you die. As a permanent life insurance policy, it also earns a cash value as it matures — so it’s a life insurance policy with a built-in savings account.
There’s the option of borrowing cash from your whole life policy and using funds for a variety of purposes, such as medical expenses, retirement or an emergency.
Keisha Blair, co-founder of Aspire-Canada, said this type of investment is comparable to your own personal bank account. “It’s like a regular account you can use for retirement,” said Blair. “Plus the rates of return have been pretty good, averaging 7 percent or so.”
Any funds you take from a whole life policy are deducted from the death benefit paid to your beneficiaries.
A regular savings account isn’t going to offer the highest return on your money. And even if you dabble with stocks, you might not receive the desired return. Sometimes, you have to do more. Exploring different types of alternative investments gives your portfolio the power it needs to grow and achieve your financial goals.
Source -gobankingrates.com
Ultimately advisors, and their clients, are turning to alternative strategies because they provide an additional tool that can increase diversification and boost returns.
Alternative investments were originally the sole province of institutions and the wealthiest of families, but in recent years access has been democratized as an increasing number of alternative strategies have been packaged in ’40 Act mutual funds. A primary reason advisors are including alternative strategies in their clients’ portfolio is that they broaden diversification and give investors a risk/return profile different from that provided by equities, bonds or cash.
Investment theory continues to evolve, and a contemporary approach starts with the idea that a fully diversified portfolio does not just hold long, unlevered positions. In order to realize the maximum benefit from a particular strategy the portfolio might also hold potentially levered positions, where more than 100% of the portfolio is invested, or it could be betting against a stock and hold short positions.
Although it is popular right now to call this diversified approach an alternative strategy, it has become so mainstream that an argument can be made that it is actually at the core of modern portfolio construction. Some investors look at alternative strategies as a seasonal play as in, “I think stocks are expensive right now, so I need some alternatives to reduce the risk,” or “We think stocks are very cheap and so need some alternatives to bring a new set of tools to the portfolio.” That kind of thinking can severely limit the investors’ chances of long term success by ignoring the benefits that alternative strategies can bring in any market environment. Investing by looking in the rear view mirror and chasing last year’s winners can be a dangerous game to play.
Generally speaking, most alternative strategies fall somewhere between stocks and bonds in the overall risk profile they bring to the portfolio. They almost universally have a lower volatility or a lower risk than an all equity portfolio and depending on the strategy they probably have higher risk than a bond portfolio. Over time these strategies also have, after adjusting for the higher risk level of stocks, been shown to have a higher return.
Most advisors look at alternatives as portfolio diversifiers because they don’t have a high correlation with stocks or bonds and fit somewhere between the two in terms of risk profile. It’s important to remember that the lack of correlation can mean different things at different points in the market cycle.
For example, the dominant asset class for the last few years has been large cap US stocks and by comparison virtually every other asset class appears to have underperformed, but most people aren’t investing only for today or for the next five or six years. The reason that diversification is important in portfolio construction is because investing is a long-term proposition, and it is performance over time that should be most important to investors.
A superficial look at returns would seem to indicate that US stocks have been a great place to park your money. However, closer examination reveals that even in the current environment, there’s a price to pay for this approach relative to a portfolio containing a good multi-strategy alternative. From the standpoint of absolute returns, US stocks have done better than other asset classes, but in terms of how they’ve done versus the risk in the portfolio, the best multi-strategy hedge fund managers, net of fees, have still done better.
Source - wealthmanagement.com
How your hard-earned money is allocated among the asset classes, such as shares (or equities), commodities, bonds, listed property, forex and cash, is the main determinant of the returns you will earn. You can make that decision yourself, or you can leave the decisions about asset allocation to a professional. One way of doing the latter is to invest in a multi-asset unit trust fund or structured investment products, where an asset manager decides on an allocation within the constraints imposed by regulation and the fund’s investment mandate.
Multi-asset or unit trust funds or structured investment products invest in a broad range of assets, including shares, bonds, commodities, forex, money market instruments and listed property. The fund managers of multi-asset funds decide which asset classes they believe will produce the best returns, and then, within those classes, which securities will perform the best. Some funds have a fixed, or strategic, allocation to the different asset classes, whereas others change the mix of asset classes in line with their views of how the different classes or securities will perform (tactical allocation).
These funds were designed as long-term investment vehicles for people who wanted to invest pension and retirement money. Although multi-asset funds still aim to maximise capital and income growth over the long term, the funds have diversified over the years and the risk levels now vary considerably.
The decision on whether to invest in structured investments or unit trust funds that invest almost entirely in one asset class or a multi-asset fund, or a combination of the two, depends on your financial circumstances, investment goals, the risk you are prepared to take and how long you will be invested (your investment time horizon).
There are some disadvantages to investing in a multi-asset fund:
- Certain asset classes, sectors of the market or areas of the world perform exceptionally well at certain times. You may not derive the full benefit of this out-performance if you are invested in a multi-asset fund that cannot maximise its exposure to a single asset class, market sector or geographic region.
- Some of the top-performing asset managers offer funds that specialise in certain asset classes only, and you will not benefit from their expertise if you do not invest in single-asset funds.
- Few managers have skills in both asset allocation and the selection of individual securities; therefore, it may be better to invest in a single-asset fund where the manager has to focus only on selecting the securities.
The main problem with making asset allocation decisions yourself is that you do not have the information, expertise or experience to know when to adjust your mix of assets. Unfortunately, most investors make asset allocations based on their emotions, usually fear (when an asset is losing value) or greed (when an asset is gaining value). These reactive decisions are often short-sighted and fail to take into account the sound reasons for remaining invested in an asset or not investing in one.
The manager of a multi-asset fund is in a position to understand how the fund is positioned relative to all the factors that may influence the performance of the asset classes in which the fund is invested, in conjunction with changing market conditions.
Another benefit of multi-asset funds is that, because they are diversified across asset classes, they are less volatile than single-asset funds. Over the long term (at least 10 years), a multi-asset fund can provide you with smoother and better returns than an investment in a single asset.
