What are asset classes?

Asset classes are a way of classifying investments into groups.

These groups will feature separate individual investments that will behave similarly, but their performance can vary for many reasons.

Let’s take cash, for example.

Cash is the overall asset class, but it can be held in different ways. You might have cash in your current account and money in a cash ISA.

So while they’re both in the same asset class and have broadly similar characteristics, they will be used for different purposes, and the outcome of each investment is likely to be different.

Similarly, stocks and equities are considered to be the overall asset class, but this can encompass many different kinds of investments.

For instance, you can hold stocks in a fund or have individual shares in a company. And there are all the individual options, such as companies to buy and sell.

But they’ll all come under the same overarching category.

Ideally, an investor will have a mixture of asset classes in their financial plan, such as cash, stocks, bonds, property and commodities like gold.

By having a diverse range of assets in your portfolio, you can be more resilient in the face of sudden shocks, such as economic difficulties or a crash in one specific market.

By making sure you’re not exposed to high levels of risk in one area, you’ll be in the strongest possible position to achieve your financial goals.

We hope you find this little explainer useful.

As financial advisers, we often deal with lots of technical terms and industry jargon that can be difficult to get your head around.

Our job is to make sure you fully understand what’s going on and can make any decisions with your eyes wide open.

So if you have any questions about what certain terms mean and how they’re relevant to you and your finances, please don’t hesitate to get in touch.