An asset class is a grouping of comparable financial investments.
One can break these instruments into real assets and financial assets. Often, assets within the same asset class are subject to the same laws and regulations. (but not always due to different regulations.)
Real assets are physical assets that have an intrinsic worth due to their substance and properties. Real assets include precious metals, commodities, real estate, land, equipment, and natural resources.
They are generally for investors who are particularly concerned about inflation, currency prices or other macroeconomic factors.
They can be used in hedging a portfolio against risks and loss.
Financial assets are cash, stocks, bonds, mutual funds, disruptive technologies and bank deposits. Unlike real assets they do not necessarily have inherent physical worth or even a physical form. They rather reflect factors of supply and demand in their marketplace, as well as the degree of risk they carry.
Financial assets state their value on a piece of paper such as a dollar bill or a listing. They derive their value from a contractual claim on an underlying asset.
Don’t put all of your eggs in one basket:
Diversification is probably one of the oldest and most important concepts in the world of investing.
Because some investments rise in value while others decline, the basic reason diversification is important is that it tends to dramatically lower the overall risk in an investor’s portfolio. An investor invests in different assets and asset classes without running the risk of getting completely wiped out when one of those goes south.
Asset classes reflect different risk and return investment characteristics and perform differently in any given market environment.
Investors are always interested in maximizing their ROI and often do so by reducing portfolio risk through asset class diversification.
Diversification is a technique to help reduce risk. By having elements of different investment classes in one´s portfolio the smart investor can protect the portfolio from losing the value if it only contained one failing asset category.
So the two steps to diversification are
- to spread the money among different asset categories,
- and further allocate those funds within each category.