When determining your investment portfolio strategy and long term goals, it is important to know a little bit about the different asset classes you can choose to invest in. Establishing a portfolio which invests in several different asset classes will make your portfolio more diversified. This means that your risk is spread over several different options. If one asset class goes down, another asset class may be going up.

An asset class is a grouping of similar investments or securities that tend to move together. In a broad sense there are only a few asset classes while there are different investment categories within the broad investment classes. The three main investment classes are Cash, Fixed Income and Equities. A fourth special asset class can also be considered. This class includes commodities and private equity which can include hedge funds, venture capital funds and leveraged buyouts. Real estate is also considered an asset class which is not a part of the stock market investment pool.

Within the cash asset class, you can include money market, certificates of deposits, institutional savings plans, The Fixed Income class can include U.S. Treasuries, Foreign Bonds, municipal bonds, corporate bonds and asset-backed securities. The Equity asset class can include domestic equities including stocks, developed market equities which are stock investments in Europe and the Pacific Rim, Emerging Market equities which are stock investments in developing countries such as Brazil, China and India. Another category in the Equity class would be real estate investment trusts or REIT’s.

There are different thought process from investment advisors as to how many of the asset class categories an investor should be invested in to properly diversify their portfolio. John Bogle, the founder of Vanguard, feels that two classes are sufficient. These classes would be the U.S. Bond market index and the total U.S. equity market index.

David Swenson who runs the Yale endowment feels that 6 major asset classes (domestic equity, foreign developed securities, emerging markets, REIT’s, U.S. Treasury Bonds, Treasury inflation protected bonds) would be all you would need.

William Bernstein, an asset allocation author, feels you should have over 20 different asset classes.

It is hard to know exactly but it is a given that to be properly diversified, you should have around 4 – 8 different categories across the three major asset classes. Investing in the special asset class is speculation. A review of the historical risks and returns along with some advice from an investment advisor would help to determine the type of portfolio you should develop.

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