An asset class is a grouping of similar investments whose prices tend to move together. Asset classes can be defined on a very general level, such as stocks or on a more specific level, such as American silver producing companies.
The concept of asset classes is important because one of the goals when building an investment portfolio is to use different asset classes which are not correlated with each other. It is critical to know what type of asset classes you currently own to see if your asset allocation (amounts of each asset class) is appropriate.
General asset classes (and most well known)
- Equities – this could be individual company stocks or shares of a stock mutual fund.
- Fixed Income – an example is any type of bond or certificates of deposit.
- Cash – usually money in a high interest savings account but could also include money carefully hidden under your mattress.
Each of the general asset classes can be broken down to more specific asset classes.
Equities can be broken down by:
- Size - large companies, small companies
- Industry – health care, energy, technology
- Country – American companies, European countries.
- Type - value or growth companies.
Bonds can be broken down by:
- Safety – a bond issued by the United States government is considered safer than a bond issued by General Electric which in turn is safer than a bond issued by Washington Mutual.
- Term – a short term bond ( ie one that will come due in less than 1 year) is not as risky as a longer term bond (ie due in 20 years).
There are many different definitions for asset classes so it is important to learn the general asset classes (stocks, bond, cash) and then learn the more specific classes if they are applicable.
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