Asset Allocation May Be an Diversified Asset Class Issue

The term instrument might suggest a trumpet or a scalpel rather than a stock or a bond. Similarly product is more likely to make you think of vegetables or running shoes than of currency. But the terms are used frequently and often interchangeably to refer to both specific investments and to investment vehicles, or mediums for investing, such as unit trusts and mutual funds.

Asset class is a category or type of investment, such as stocks or bonds. All investments in the same class share characteristics that differentiate them from another asset class. Each class typically has a number of subclasses of investments whose similarities are even more narrowly defined. For example, small-company stocks are a subclass of stocks.

There are nine traditional asset classes, each of which behaves differently enough from the others to merit its own category, and a number of nontraditional classes.

• Cash Equivalents
• US Equities
• Non- Dollar Equities
• Mortgage Backed Securities
• Short Term Debt
• Long Term Debt
• Non- Dollar Debt
• Real Estate
• Precious Metals

Other assets are harder to assign to conventional asset classes, often because they behave differently than their names would suggest. That’s the result, in many cases, of actually straddling two classes.

Contributions from the book Understanding Asset Allocation in this press release are used with permission from Light Bulb Press.