Definition of asset class

A broad group of securities or investments that tend to react similarly in different market conditions. Individual asset classes are also generally governed by the same rules and regulations. There are three basic asset classes: equity securities (stocks), fixed-income securities (bonds), and cash equivalents (money market vehicles). Real estate, commodities and derivatives are also considered asset classes by some. [1]

Bonds, equities, property and cash are all asset classes and the way you spread your money between asset classes is your asset allocation. A risky asset allocation consists mainly of shares and a conservative allocation consists of more bonds, property and cash.

Deciding how to diversify your portfolio is known as asset allocation, and one of the easiest and most popular ways of doing that is to adopt the age-adjusted mix.

Quite simply that means taking your age, subtracting that from 100, putting a percentage sign at the end and then investing that much of your total portfolio into shares. So if you’re 35 years old, 65 per cent of your money should be tucked away in equities with the rest invested in a mixture of bonds, property and cash. [2]