Looking at the market performance in January, it is clear that the new year has been carrying the pessimism of the last year and this trend is likely to continue for some time, at least until there are no clear signs of a pause in Fed rate hikes.
The road ahead for the market is hazy. Equity investors across the globe are concerned over high inflation, rate hikes, global economic slowdown and geopolitical tensions.
Even though many analysts and brokerage firms still have faith in the Indian market and expect it to outperform in 2023 too, it is too early to predict how the market will behave for the entire year.
It's time to remember the cliche, "Uncertainty is the only certainty."
Then, what should we do? Should we exit the market and sit on cash?
The answer is no.
Smart investors adjust their trading style as per the market sentiment.
We need to make some tweaks to our investing style. It will be best if we trim our exposure to equities and invest in other asset classes also, such as debt, gold, etc.
In simple words, it is the best time to follow a multi-asset strategy.
What is a multi-asset strategy?
A multi-asset strategy is a way of investing in several asset classes, such as stocks, bonds, real estate, gold, cash, etc.
Every asset class offers its unique advantage but overexposure to one asset class can be very risky. When different asset classes come together in a portfolio, the risk factor reduces and the portfolio becomes stronger.
Hence, a multi-asset strategy combines different asset classes to create a diversified portfolio which minimises the risk of overexposure to one asset class. In case a particular asset class performs really badly, you are saved.
Asset management firms, insurance companies, and other large institutional investors widely use multi-asset strategies.
But one needs to remember that a multi-asset strategy is not a "one-size fits all" investment approach. In fact, the exposure to each asset class depends on an investor’s risk appetite, financial goals and even investment horizon.
Time apt for a multi-asset strategy
Many experts believe it is the right time to follow a multi-asset strategy in investing because of the uncertainty in the market and the global economy.
"Given that we are entering into a new era marked by high inflation, high-interest rates, low liquidity, elevated volatility and geopolitical concerns, it is imperative to adopt a multi-asset approach to investing. For an investor, this can be easily achieved by investing in a multi-asset fund which allocates to three or more asset classes," said Chintan Haria, Head of Investment Strategy at ICICI Prudential Mutual Fund.
Ashish Naik, a fund manager at Axis AMC, says investors can easily combat volatility by adopting a multi-asset strategy.
"Oftentimes, the word volatility scares us since we believe that it is the ultimate risk quotient to an investor. While it surely signifies some levels of uncertainty, we believe that when leveraged correctly, volatility can be an ally to the long-term investor. One of the most prudent ways to combat volatility is adopting a multi-asset strategy," said Naik.
Naik believes a well-defined asset allocation strategy has the potential to help investors walk the tightrope between risks, rewards, and opportunities.
"By diversifying into multiple asset classes that have a lower correlation between each other, the ability of the portfolio to compound over the long term improves significantly even in the face of economic headwinds. The key learning for investors here is that when wealth is spread across various asset classes, the potential of earning risk-adjusted returns may increase manifold," said Naik.
Naik also highlighted that a multi-asset allocation strategy may allow the investor to spot alpha opportunities irrespective of the market cap or asset and add incremental returns to the portfolio.
Maintain a fine balance
Retail investors tend to think that by following a multi-asset strategy, they may lose on the gains of a roaring equity market. It is a myth because, in a multi-asset strategy, you can increase or decrease your exposure to an asset class as per your risk appetite and investment goals.
However, one needs to understand that over a long time, equities outperform fixed-income asset classes. If one has a goal of getting healthy returns on his/her investments, he/she cannot afford to ignore equities.
But this does not mean putting all money into equities either.
Sunil Damania, Chief Investment Officer of MarketsMojo, said a multi-asset approach is always recommended in any market. Even if the market is expected to outperform, one should not put all money into equities.
"When using a multi-asset approach, the only difference is that you adjust your holdings of debt, equity, gold, etc.
We believe that 10-15 percent of one's total assets should be invested in gold or silver, depending on personal preference," said Damania.
Damania believes the best way to invest in gold and silver is through ETFs or the Reserve Bank of India's Sovereign Gold Bonds.
"Consider setting aside an additional 10-15 percent in debt or fixed-income investments as emergency funds that could also generate a consistent source of income. The remainder should always be invested in equity," Damania said.
Damania has a logic behind giving such a recommendation.
"We recommend such an allocation because, despite the market's short-term volatility, equities will always outperform fixed-income instruments over time. Therefore, increasing your stock allocation is necessary to create wealth," he said.
"It is essential to differentiate between savings and investments. When you invest in a fixed income, it becomes savings. When you put money in equities, it becomes an investment. Hence, wealth creation can occur only via equities and not fixed income," said Damania.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.