Why time horizon is so important for multi-asset investors

This article is part of
Guide to risk and return in multi-asset

Why time horizon is so important for multi-asset investors

As mentioned earlier in this guide, advisers will have established their clients’ capacity for risk and volatility before choosing the right multi-asset fund for their portfolio.

It is equally important for advisers to establish their clients’ investment time horizon as part of the fact-finding process.

Actually, time and risk go hand-in-hand. Generally speaking, the longer a client has to invest, the more risk they might be willing to take, while clients with a shorter time horizon may well want to play down their exposure to risk.

Time horizon and risk tolerance are key to identifying the appropriate multi-asset strategy, says Mike Coop, head of multi asset portfolio management at Morningstar Investment Management Europe.

Clients with decades of time to stay invested are likely to have a very different risk profile from those who plan to retire within the next 10 years.

Ben Seager-Scott, chief investment strategist at Tilney Group, explains: “A client’s time horizon is crucial for establishing their risk profile, which should naturally be done considering both a given client’s ability and willingness to tolerate risk.”

He continues: “Generally, asset classes with higher return potential come with higher risk, which means they can suffer losses for potentially several years before hopefully recovering.

“Clearly, investors will need a longer investment timeframe to be able to ride out changes in the cycle.”

It is anyone’s guess what the next three, five, 10 or 15 years will bring in stock markets. 

Clients are unlikely to want to make predictions, so a multi-asset fund can be advantageous, taking asset allocation decisions out of clients’ hands.

While multi-asset fund managers certainly do not have access to a crystal ball, they do have the ability to adjust funds’ asset allocation in order to maintain the risk profile.

This means that clients, with the help of their adviser, can choose a fund that meets their risk profile, while the adviser monitors it to ensure it stays within their clients’ risk parameters.

Dry January

It seems multi-asset funds are proving a popular choice for UK investors during times of heightened political uncertainty, on the basis they are able to spread that risk.

The Investment Association published its net retail sales figures for January 2019, which showed this is indeed the case.

Mixed asset was the best-selling asset class in January, having clocked up net retail sales of £367m.

Chris Cummings, chief executive of the Investment Association, said: “Dry January extended to the fund markets as savers remained cautious, heralding the fourth consecutive month of net retail outflows. 

“The threat of a no-deal Brexit, eurozone instability and international trade tensions combined to dampen investor appetite, with savers looking towards mixed asset funds to spread their risk.”

How might a multi-asset fund designed for someone in the accumulation phase differ from one invested for those reaching decumulation?