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Should Multi-Asset Strategies Be A Part of Your Retirement Plan?

A multi-asset strategy typically refers to an investment approach which aims to allocate funds in multiple asset classes. This strategy came into existence for two reasons:

  • It solved the innate need of investors for product differentiation
  • It became more sensible to invest in the strategy after the global financial crisis to distribute the overall risk

Multi-asset strategies help investors gain access to various asset classes, as well as investment styles only to help mitigate the volatility impacting one or more market spheres. Over the years, with the increasing dynamicity of the financial markets, multi-asset strategies have become widely popular. Fundamentally, this is because they extend far beyond the typical 60/40 equity and bond split or vice versa. The universe of the varied asset class strategy involves equities, conventional bonds, private assets, currencies, real estate, commodities, and other alternatives. This strategy is suitable for investors aiming to build a substantial and protected retirement fund.

Here is why multi-asset strategies should be a part of your retirement plan:

Optimal balance of risk and return

Gone are the days when fixed classification of investments into equities and bond as per the 60/40 ratio was able to garner significant returns for the investor. The winds have now changed, and today, one cannot potentially earn enough or safely guard their investments, giving a growing risk and increasing correlation of the two asset classes – equity and debt. Thus, the emergence of hybrid financial asset classes was critical, as it provides a balance of return and risk.

A portfolio that involves active investments across multiple asset classes has a higher potential of generating returns from various sources. It can also better adapt to changing market conditions. Moreover, the risk can be balanced by diversification across different asset modules, subject to individual market conditions, which can optimally balance the overall risk.

Ideal asset allocation

Asset Allocation in multi-asset strategies is unparalleled and provides significant gains for the investor. Unlike typical investment plans, a multi-asset tactic involves setting an upper and lower cap exposure limit to varied asset programs. These programs require an active rebalancing of funds through tactical and strategic asset allocation while staying within the upper and lower cap exposure limits. This makes rebalancing of assets more disciplined and focused, providing a higher scope for investors to benefit from a sudden influx in asset classes.

The strategy also appreciates the interconnection of global markets and the impact of information across asset divisions. This further pushes the need for active allotment and rebalancing of assets across spheres. Though, on the contrary, in some cases, due to continuous rebalancing, the investors are unable to benefit from prolonged gains that accrue to an asset class. But the fundamental reason for investing is to get an ideal balance between risk and reward for the long run.

Flexible and dynamic portfolios: Active allocation and rebalancing tactics of multi-asset strategie allow an investor to gain full potential through flexible and dynamic portfolios, which combine several investment approaches and swiftly adapt to changing market conditions. This strategy allows an investor to navigate potential market shifts, seek out sectors of higher potential return while avoiding areas which can add uncalled risk to the portfolio. A multi-asset strategy aims to dynamically allocate portfolios, which vigorously adjust as per benefiting market conditions, with an overall objective to provide positive returns in the long-run.

Decisions such as devoting more funds in overseas, shifting assets from bonds to other income-garnering securities or withdrawing risk to look for better opportunities, etc. can all be executed swiftly to take advantage of changing market conditions. These flexible and dynamic portfolios aim to provide a long-term appreciation of funds by allowing exposure to lower volatility levels as compared to stocks. Such portfolios, which are flexible and dynamic to the ever-changing market scenario, are very helpful for investors aiming to create a retirement fund.

Source of absolute return

Multi-asset investment strategies are also very useful for another reason, which is their subtle promise of absolute growth. These portfolios aim to garner consistent returns across market cycles with low correspondence to conventional stocks and bonds. The typical performance profile of such portfolios is generally dominated by long-time exposure to traditional equity and fixed-income assets, higher correlation to emerging market debt and high-yield bonds, and some dynamic asset allocation. All of these are aimed to harvest the maximum returns and minimum risk for an investor. Though the allocation of assets and exposure depends on the risk-taking ability and the time horizon of the investor, yet conclusively this approach aims to enhance returns and limit the risk.

Benchmark-agnostic

The most critical advantage of multi-asset strategy is that they are benchmark-agnostic and hence, do not compare the performance of portfolios against a benchmark. Instead, they focus on a target-specific investment outcome such as exceeding inflation, to provide handsome returns in the long-run. This is the ideal strategy for retirement planners since the ultimate need is not to fulfill short-term requirements but adequately provide for long-term life. Focusing on a benchmark can often lead to wrong investment decisions. For example, in a fixed income market, the higher benchmark weights are the most indebted ones. Investments that compare performance with these benchmarks will not provide suitable returns. Being benchmark agnostic allows better focus on best investment ideas, irrespective of short-term fluctuations, which is ideal for someone planning a retirement.

Target-date funds

Specifically suitable for retirement investors, multi-asset strategies offer target-date funds, the allocation of which can be altered depending on the investor’s time horizon. The time horizon also alters the investment portfolio and corresponding asset allocation to suit the needs of the investor. This is very useful in some cases. For instance, if a person at the age of 30 wishes to retire in 2050 (approximately after 30 years from now), then the investor should select a fund that matures in 2050 or after that. Whereas, a person aged 50, who aims to retire at the age of 62, has few years to hold the assets, hence, he/she must opt for a fund that matures sooner and is able to provide benefits on retirement.

The allocation of asset classes will differ in both to provide for the ultimate objective, given the time horizon. The investor, who has more time at hand, will have an aggressive asset allocation with more equity, less fixed income, and other classes. Whereas, a person due to retire soon will have a higher level of fixed income assets with the aim to condense the overall risk and make capital preservation the focal point of investment. Multi-asset strategies allow you to shift your investment mix to a more conservative one, as the target date approaches. Target-date funds are the primary option sought by retirement investors.

To sum it up

Multi-asset strategies originated to provide the much-needed peace of mind to the asset owners amidst the uncertain investment environment. Given the current low-interest rates, rising political uncertainties home and aboard, increasing volatility and expensive capital markets, a bespoke multi-asset investment approach is essential for a balanced retirement plan. Based on the varied advantages of multi-asset plans, it is also beneficial for a retirement planner to analyze the applicability of the strategy to their situation and plan.

Since a multi-asset strategy requires disciplined balancing and redirecting of asset classes, consulting professional Financial Advisor can be helpful.

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