Asset allocation explained: classes, regions and sectors

An asset class is a family of investments that behave in a similar way.

The usual families are stocks, bonds, cash, gold and other metals, and crypto assets. Stocks are ownership shares in companies and move with company results and sentiment. Bonds are loans with a promised payment and move with interest rates and credit worries.

Cash is stable in nominal terms and loses purchasing power to inflation. Gold is held by many as a store of value that does not depend on any one company. Crypto assets are a young and very volatile class.

Within stocks, the region where companies are listed or earn their money is a second view. A portfolio concentrated in one country depends on that country's economy, currency and policies. A wider spread reduces that single dependence but adds currency effects.

A third view looks at industries: technology, health care, financials, energy and so on. Two portfolios can contain different stocks and still be exposed to the same sector, so a sector view shows concentration that a list of names hides.

A cautious allocation puts more weight on bonds and cash, a balanced one is in between, an aggressive one puts more weight on stocks and other volatile classes. A model split for each level is an illustration of how such a mix looks. It is made for nobody in particular: it does not know your goals, your age, your income or your taxes, and it names no security.

Assets that grew become a larger share of the portfolio and assets that fell become a smaller one, so a mix set once is not the mix a year later. Seeing the drift is the first step in deciding whether it matters to you.