What Is a Multi-Asset Class?
Let me explain what a multi-asset class is. It's essentially a combination of different asset classes—like cash, equities, or bonds—put together as an investment. When you invest in a multi-asset class, you're getting a portfolio that includes more than one type of asset, and the mix of weights and classes depends on your specific needs as an investor.
How Multi-Asset Classes Work
You should know that multi-asset class investments boost the diversification of your overall portfolio by spreading investments across several classes. This approach cuts down on risk, specifically volatility, when compared to sticking with just one asset class, though it might also cap your potential returns. For instance, if you're a multi-asset investor, you might hold bonds, stocks, cash, and even real property, while someone focused on a single class might only have stocks. Remember, one asset class can shine in a given period, but no single class outperforms consistently over time.
Risk Tolerance Funds
Many mutual fund companies provide asset allocation funds tailored to your risk tolerance. These range from aggressive to conservative profiles. An aggressive fund, for example, would tilt heavily toward equities, possibly up to 100%. Take the Fidelity Asset Manager 85% fund (FAMRX) as a case—it's set up to keep about 85% in equities and 15% in fixed income and cash. On the conservative side, funds emphasize fixed income more. The Fidelity Asset Manager 20% fund (FASIX), for instance, allocates 20% to stocks, 50% to fixed income, and 30% to short-term money market funds.
Key Takeaways
- A multi-asset class is primarily built to limit downside risk by broadening your exposure to different sectors.
- Some ETFs could be considered multi-asset class investments.
- Multi-asset class investments can change over time to accommodate your direction, with target-date funds being a classic example.
Target Date Funds
Target-date funds are multi-asset options that adjust their allocation based on your time horizon. You pick the fund that matches your expected retirement date—for someone not retiring for over 30 years, that might mean a 2045 or later fund. The further out the date, the more aggressive the fund, thanks to the longer timeline. A 2050 target-date fund might have 85% to 90% in equities, with the rest in fixed income or money market. If your horizon is shorter, say retiring in five years, you'd choose a nearer-date fund with more fixed income to lower risk and protect capital. These funds suit you if you prefer not to handle asset allocation yourself. As you age and your time horizon shrinks, the fund's risk level drops automatically, shifting gradually from equities to fixed income and money market.
Benefits of Multi-Asset Class Funds
Unlike balanced funds that aim to match or beat a benchmark, multi-asset class funds are structured to hit specific investment goals, such as outpacing inflation. They offer broad investing options across securities, sectors, real estate, and more, giving them significant flexibility to meet those objectives. This setup provides more diversification than typical balanced funds, which often mix mainly fixed income and equities. Many are actively managed, where professionals make decisions based on market dynamics to maximize your returns and control risk.
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