Reduce Risk With a Multi-Asset Investing Strategy

We have all heard the phrase diversification is the key when building a balanced portfolio and hedging against risk.

The problem is making the right kind of investments as investors have different views on what is the best kind of investment vehicle for diversification.

A large proportion of investors choose to split their investments between stocks and bonds, Unfortunately, holding these two popular investments is often not enough.

For optimal reduced risk and hedging against downturns in the market, investors should use a multi-asset investing strategy.

Based on the historical evidence in times of increased volatility, stock and bond markets often move in line with each other.

Altering economic environment that causes one market to go down can pull the other with it, thereby increasing the correlation between stocks and bonds. For that reason, it’s important to pursue diversification on multiple levels, not just through stocks and bonds.

All investors know that markets are loyal to no man, and a market correction at some point is inescapable.

A smart investor knows to guard against a drop in the monetary worth of single assets, investors should aim to diversify within distinct asset classes, and look at using a robust mix to their portfolio’s by seeking out assets classes beyond that of stocks and bonds. Holding multiple, non-correlated asset classes in a portfolio can limit downside exposure, while also providing the potential for attractive annual returns.

At times of heightened market volatility portfolios limited to stocks and bonds can often experience more significant losses.

Non-traditional asset classes, such as forestry investments, commercial real estate, private equity and private debt, have the ability to act as a hedge against market volatility and raising rates. Including these Incorporating these “alternative” asset classes into a portfolio that already includes stocks and bonds allows an investor to lower their overall portfolio correlation.

A bull market of the like we are currently seeing can often lure the investor into a false sense of security. Ask yourself what your response would be if you saw a 50% paper loss in portfolio value when many have not had to think about any sort of decline in recent years.

The better a portfolio is diversified the less chance of making panicked or emotional investing decisions in the event of a market crash.

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