In investing, we have heard many times that diversification is important for long term success. Investors have to avoid investing all of their money in a thing. Yet many investors often trap into diversifying only in the same asset class. The best way to diversify your investment is by investing in different kinds of assets. That is called multi-asset investing.
We have various ways to do multi-asset investing. But, first of all, you have to understand various asset classes.
Stock and bonds make up most of the portfolios. Besides those two, we also have cash, commodities, currencies, precious metals, and real estate.
A rear good multi-asset investing should involve many of those asset classes. That is to save your investment whenever one of those assets performs poorly. This multi-asset investment is the best way to protect you against volatility and big market swings.
Two main ways
To build a multi-asset investing, these are the two main vehicles.
Target date mutual funds
A target-date fund is a type of mutual fund. This type especially can grow and protect your savings according to when the investor expect to begin making withdrawals.
They usually write their target year within their name, like 2047. People usually use this for their retirement plan and college saving plan.
Usually, the target funds will begin aggressively mostly in stock, then shift to a more stable asset as their target year is coming. It contains a mixture of stocks and bonds, sometimes even contain cash.
Target allocation mutual funds
Most mutual funds usually offer specific target investors with a specific selection of funds. For instance, a younger investor with long investment time might select more stocks and few bonds. On the other hand, the older ones may want their investment to be more bond-heavy.
The drawbacks of multi-asset investing
Even if it is the best way to protect you from volatility and market downturns, it still owns drawbacks. One, it will not perform as well as most of the stocks during the year. That is because it also contains bonds. Thus, it will generate a lesser return.
Bonds and other non-stocks assets are not created to generate cash, they rather give you steady cash while protecting you from losses.
Additionally, usually target date and target allocation funds charge investors higher commission funds. Since their funds should be actively managed by professionals.
