What are asset-classes?
Updated by Justin Ling
An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations.
The most common differentiation of asset-classes within Investments are Equities (Stocks), Listed Property (Real-Estate), Bonds (Debt), and, Cash (currency). On EquitySim we also split out ETF's from Stocks and consider them their own asset class, and you do not have the ability to invest in real estate.
A primary characteristic associated with Asset classes is the risk-profiles of each class, this is usually defined by how the asset class performs given the current economic circumstances.
Depending on the economic circumstances different asset classes will outperform the other. In times of high economic growth, Equities should outperform, in times of low economic growth Bonds should outperform, and in times of economic turmoil, Cash should outperform. Managing your exposure to these asset classes enable you to manage how your diversified you are against these different economic scenarios.
Performance vs Risk Environment
In terms of risk-profile, from riskiest to least riskiest the general ranking is:
Equities -> Debt -> Cash
While these are not always the case for individual investments in each class (ie, there are definitely some bonds that are much risker than some equities), asset classes give you a way of thinking about investment strategy in a very high-level manner.
Creating Asset-Class Exposure
Diversification theory shows that combining different asset-classes give you higher risk-return ratios. You can invest find different asset-classes on EquitySim by using our Trade screeners: