What are asset classes?

Asset classes are groups of financial assets, such as shares or bonds, which have been classed together because of their common characteristics. For example, shares usually pay variable dividends, while bonds produce a fixed income. A balanced portfolio will contain various different asset classes as an aid to diversification.

Where have you heard about asset classes?

Investment guides will take their readers through the different asset classes, stressing that the definition of an asset class has broadened in recent years, and now includes not only shares, bonds and 'near cash', such as short-term money-market instruments but also commodities, currencies, real estate and collectibles, such as rare coins or stamps.

What you need to know about assets...

Asset classes allow investors to build a portfolio that is diversified among different types of investments. The members of each class are by no means all the same – shares, for example, vary enormously but they have enough in common to be grouped as an asset class.

From the investor’s viewpoint, the key is that the assets within one class will not only behave in a similar way but will behave differently from those in other classes. So shares will tend to do well during economic boom-times while bonds are more likely to be attractive when activity is subdued.