From Ken Little,
Your Guide to Stocks.
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You may have heard the term “asset class” in the media and wondered exactly what was meant. Financial professionals generally agree there are four broad classes of assets.

The classes are:

• Stocks or equities
• Fixed Income or bonds
• Money market or cash equivalents
• Real estate or other tangible assets

These are the classes of assets you have available to build a portfolio.

You might notice that all stocks are lumped together, when individual stocks (or mutual funds for that matter) can be quite different. For example, a small-cap stock is not going to act the same way as General Electric.

However, stocks are grouped together because they will, as a group, react more alike than any of the other three classes. The same thing is true for the other three classes.

The purpose of having all four asset classes represented in your portfolio is to take advantage of the different strengths of each class.

The whole theory of asset allocation is based on diversifying your portfolio by asset class. Read an introduction to asset allocation for more information.

Many people use Real Estate Investment Trusts and other more liquid investments to satisfy the real estate leg of the asset class tool Read an article on REITs.

Conclusion

A portfolio that only contains one or two asset classes is not diversified and may not be prepared to take advantage of all the swings the market can throw at you.