Among the biggest challenges for investors is building a portfolio with the right mix of assets to protect them against sudden losses when markets fall.
A typically diversified portfolio is made up of a range of different assets such as equities, bonds, property and cash. As each type of asset performs differently at various points in time, making sure your asset allocation is diversified can help reduce overall volatility.
Diversification doesn’t mean all risk attached to investments is wiped out, but it can potentially mitigate the risk of losing significant amounts of your savings if the market suddenly falls, compared to investing in a single asset.
You can build a varied portfolio yourself, but purchasing a multi-asset class fund - a fund that invests in a range of asset classes rather than just one – may be an easier solution. By investing in one of these funds, the fund manager rather than you, is responsible for finding the right balance between different assets.
Find out more about choosing funds
Deferring to the experts may provide some peace of mind in today’s uncertain economic climate, when it can be difficult to decide on the right of assets, or if you have limited time to regularly monitor your investments yourself. If you’re unsure about where to invest, seek professional financial advice. No matter how much you diversify, your investments can still fall in value and you may get back less than you invest.
How different assets perform in different ways
The prices of different assets often move in opposite directions depending on the economic environment and inflationary pressures. For example, government and corporate bonds typically do well in a poor economic climate as investors search for safer assets and a regular income stream. Alternatively, equities tend to perform better during periods of economic growth, as output usually increases, boosting profitability for many companies and making their shares more attractive because they are able to pay shareholders higher dividends.
Alternative assets such as commodities can - depending on your risk profile - add another layer of diversification to your portfolio. Commodities again may perform differently from other assets at times of market volatility, potentially helping to offset losses from other investments. Demand for gold, for example, typically soars during periods of heavy market volatility, as investors tend to be attracted to its perceived ‘safe haven’ qualities. Commodities more broadly have traditionally provided investors with some protection against inflation, as they tend to rise in line with the overall costs of living.
However, the price of gold and other commodities can be particularly volatile, and like investing in other asset classes there is risk involved. Commodities also pay no income, so will not be suitable for investors seeking income-producing assets.
Find out more about investing in commodities
Remember that investments can fall as well as rise, and you may get back less than you invested. Past performance is not a guide to future performance. Managing stock market volatility by diversifying your investments can be particularly important if you are relying on them to produce an income - for example, in retirement.
The multi-asset approach
Multi-asset managers aim to create conditions where asset types that are performing well can offset those which at the same time have poor performance. They typically invest in shares or bonds, but can also invest in other funds.
The multi-asset fund manager’s expertise is used to add what they believe are the most suitable assets to the mix. They will decide the split of the fund investments, and keep an eye on their performance on your behalf.
Different types of multi-asset funds are aimed at providing different outcomes for investors. For example, you can choose between those focused on producing an income stream, or funds aimed at capital growth. Some are considered more volatile than others, depending on the spread of investments.
These funds may suit investors who don’t want to take a proactive approach to asset allocation.
A multi-asset fund could form an entire portfolio or be used as a core holding, with other funds allocated to different investments and world markets.
How to invest
There is an array of multi-asset funds on offer. Before investing, consider your goals and risk profile.
If you have decades to go before you will need the money, you might be prepared to take a greater level of risk, with more time to make up any losses than if you were investing over a shorter time horizon. However, your appetite for risk depends as much on personal preference as your age.
Using our Barclays search tools online you can filter funds and search for one that meets your needs in the multi-asset category. These would be found in the sectors: IA Mixed Investment 0% - 35% Shrs IA Mixed Investment 20% - 60% Shrs, or IA Mixed Investment 40% - 85% Shrs. This enables you to pick from a variety of asset mixes, with different proportions in shares and other assets, depending on your attitude to risk.
You can then view the fund factsheet for each fund which includes it’s top holdings and how it has performed in the past as well as the Key Investor Information Document (KIID) which you must read. The KIID contains important information about the fund including details of the fund’s objectives, and risk and reward profile.
What you choose to invest in also depends on the charges you are willing to pay. Fees can have a huge impact on returns over the long-term, so it pays to consider these when deciding what to invest in, and multi-asset funds in some cases may have higher charges than other funds.
Look for the ongoing charges figure (OCF) to find out how much you’ll pay for a particular fund. Charges for passive multi-manager funds tracking a basket of stock market indices will usually be lower than active funds with a manager. Investors pay more for active funds because they aim to beat the market they invest in by finding opportunities outside the benchmark index but of course they may not achieve that aim.
Please remember that investments can fall as well as rise and you may get back less than you invested. Past performance is not a reliable indicator of future performance.