What is an asset class and what does it mean to invest in one?
Paul Swanson, co-manager of the Stanlib Balanced Fund, says an asset is something one can invest in; and an asset class is exactly that — a type of asset in which to invest.
There are four broad asset classes: equities (or stocks), bonds (or fixed income), cash (or money market equivalents) and property (or other tangible assets).
An investor could choose to invest directly in equities, bonds, cash or property, through a specialised fund.
The purpose of having exposure to all four asset classes — with some offshore exposure — within one’s portfolio is to take advantage of the different strengths of each class, which have both negative and positive correlations. When certain assets perform well, others will inevitably do badly (for example, when equities do well, bonds can perform badly). With a mix of asset classes across an investment portfolio, overall risk can be reduced.
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