Starting out
Asset class
A group of investments that behave alike and are driven by the same broad forces.
How it works
The traditional four are equities (ownership of companies), fixed income (loans to governments and companies), cash and equivalents, and real assets such as property and commodities. Some people add a fifth for digital assets.
The grouping is useful because the differences between classes are usually larger than the differences within one. Two technology shares will move together more often than a technology share and a government bond will, and that is the fact diversification is built on.
Where it misleads people
Correlations between classes are not constant. In a serious liquidity crisis, things that normally move apart get sold together, because people sell whatever they can rather than whatever they want to. Diversification tends to work least well exactly when you need it most.
Related terms
- AssetAnything you own that has value and could, in principle, be sold or produce income.
- DiversificationSpreading money across things that do not move together, so no single failure can decide your outcome.
- CorrelationA measure from −1 to +1 of how closely two investments move together.
- Asset allocationHow you divide money between asset classes — the decision that drives most of your long-run experience.
More in Starting out
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.