As the nights get lighter and we start to have more confidence that spring is finally on its way, within financial markets there is also more confidence about the economic outlook. However, the Met Office predicts a mixed forecast before the month is out. This leads us to consider if the world economy will also become more uncertain and what questions this poses for investors.

Despite signs of improving rates of economic growth, many commentators are worried about geopolitics and portfolio constructors need to consider an increasing range of political risks. After markets initially focused more on the domestic aspects of President Trump’s policies, more recent statements about immigration and trade renegotiations were a disconcerting reminder of the potential for upsets to growth, inflation and profits dynamics. Market attention has also turned towards the spate of European elections in 2017, with questions about the extent of the populist backlash against the establishment.

There is a broad range of other geo-political issues, such as China and disputes in the South China Sea or the impact on parts of Europe of a resurgent Russia. All in all, there are a large number of low probability, but potentially high impact, events that investors need to monitor.

One popular approach to navigating uncertainty is the use of multi-asset funds to attain a balanced, diversified portfolio of assets. The theory is that by investing across a diverse range of assets and regions you can create a portfolio that spreads risk and avoids concentrated exposure to a single asset class or geographic area.

Depending on risk appetite, there is merit in having some long-term exposure to growth assets, such as equities and real estate, while balancing this with an allocation to income yielding assets, such as selected emerging market debt and corporate bonds. It pays to be diversified across different assets no matter what the outlook, or how confident we may feel about the future prospects for markets.

Given the wide range of investible assets available to managers, funds can be created that are tailored to specific objectives. This means that investors can choose a multi-asset portfolio that matches their risk tolerance, rather than simply hold a traditional one size fits all balanced fund. This provides investors with the ability to select from funds that are more likely to produce outcomes that are consistent with their risk appetite.

However, it is important to remember that as macroeconomic events unfold over time, the risk profile of portfolios can change if the mix of assets is not reassessed and rebalanced to reflect these changes in market conditions. Portfolios with a static asset allocation can be exposed to ‘risk drift’ or become unsuitable for the underlying investor. Therefore, it is imperative that multi-asset strategies have the ability to adapt while also remaining faithful to their prescribed risk profile.

In order to maximise diversification and manage risk it is essential to have a detailed understanding of how each asset class is expected to behave during an economic cycle, its predicted volatility and its relationship with other asset classes. In turn this helps to construct diversified portfolios with the aim of producing the highest level of return for a given level of risk.

We have been through a sustained period of underwhelming economic growth, defined by subdued inflation and low yields. While such an environment remains, there has been some evidence of this backdrop shifting in recent months. However, such a development is far from certain and the benefit of a multi-asset approach is that, by holding a diversified array of assets, a portfolio should not be overly susceptible to any particular outcome. Different assets perform well in different environments, and combining those assets in a prudent and sensible fashion has material long-term benefits in terms of both return and risk.

Of course, diversifying across a range of assets is no panacea, and ensuring the portfolio matches your appetite for risk and is constantly monitored is vital. However, as a starting point for building a portfolio for uncertain times, a diversified, multi-asset approach is essential.

Joe Wiggins is a fund manager at Standard Life Investments.