Lesson 4: Multi-Asset Funds can make life very easy!
Multi-assets funds are a great way to have a diversified portfolio and can be likened to an investment ready-meal. Instead of buying all the ingredients and worrying about assembling it all you can just outsource everything to an investment manager.
An expert mixes it for you
The idea here is that the investment manager will consider the full range of all investments and blend together the right mix for you. So they will think about what is the best blend of shares, bonds, property, commodities, gold, cash and other things. These are known as asset classes.
There is a well -established school of thought – known as Modern Portfolio Theory – which says that the right blend of all these types of assets will produce a certain return, for a certain amount of risk. The more risk you take, the higher the returns will be. And most portfolios have a diversified range of things in, so you do not put all of your eggs in one basket. This is all well and good, but it puts many people off. Because they don’t know what to pick. A multi-asset fund takes the need to pick away from you, and outsources this.
The precise mix of ‘asset classes’ is important because different combos will give investors a different journey. The more they add typically lower-risk things like cash and bonds to the mix, the smoother the ride you should have. But the lower the potential long-term returns are.
Getting the right mix for you
The more they add shares – and the ‘highest-risk’ options here will typically be 100% in shares (or ‘equities’) then the bumpier the ride, but the greater the chance of you making more in the long-run. So if your timeframe is relatively short – let’s say 4 or 5 years – most people will look at a multi-asset fund with a lower risk profile. But if your timeframe is long – for example you’re saving into a pension in your early 40s – then most people will look at the highest (or higher) risk profile.
Most managers will offer a few choices when it comes to their multi-asset funds. A lower risk choice, sometimes called Defensive or Cautious, which could only have 20% to 4% in shares. A medium-risk choice, sometimes called Balanced which could have around 60% in shares. Or a higher-risk choice, sometimes known as Adventurous or Aggressive, which will be between 80% and 100% in shares.
Once you have decided the blend of asset classes, now the fund manager needs to decide what to populate these with.
These multi-asset funds are like Russian dolls. Inside the shares doll, for example, the manager will then pick the individual companies, such as Barclays, Heineken, Microsoft, Shell and Tesla, for example. Inside the bonds doll, they might have some UK Government bonds and some German Government bonds. And so on.
Risk and reward
So you make one choice. Which risk profile? And then you get to buy a unit in a multi-asset fund which gives you exposure to all these asset classes and, in turn, 1000s of investments. But you only make one pick (i.e., the risk profile). Simple.
Multi-asset funds are available from some of the world’s largest fund managers, such as BlackRock, Legal and General and Vanguard.
You can buy these on an investment platform (online shop). Click here to see our favourite investment platforms for beginners which will let you open an account and pop in a multi-asset fund.
