An “asset class” is a broad category of investments that tend to have similar risk characteristics and respond similarly to market forces. The most common classes are stocks, bonds, real estate, commodities, and cash equivalents.
Additional breakdowns can also be made within asset classes. For example, SMI divides stock funds into subgroups that are growth-oriented, value-oriented, and size-oriented (size being determined by market value).
The way you, as an investor, spread your money among these various asset classes and sub-groupings is your “asset allocation.” As we discuss this process for 2017, remember that the most important characteristic of your portfolio—the factor that influences the performance of your portfolio more than any other—is your asset allocation.