Asset Allocation For Dummies®

Chapter 3. Making Sense of Asset Classes

In This Chapter

• Knowing the basic asset classes to consider in your portfolio

• Understanding alternative investments

• Expanding your horizons to include international exposure

Just as in gourmet cooking, in asset allocation an essential early step is identifying the proper ingredients. The best chefs realize that each ingredient has a specific role to play when creating a delicious dish. Likewise, the best investors identify a wide variety of investment types and incorporate them in an efficient, profitable portfolio. Put in too much stock, or too much stock from a small company, and you may end up with too much of a good thing. Similarly, mix in too many low-risk, low-interest-bearing cash equivalents or bonds, and your portfolio may get weighed down and fall flat.

In this chapter, we discuss the specific features of the individual components (the asset classes and subclasses) that go into creating a successful investment portfolio. There are conventional classes that all financial professionals agree you should own (fixed income and equities), but you need to consider a number of other asset classes, too: international investments as well as alternative investments such as real estate, commodities, and hedge funds. We help you get to know the full menu of asset classes, and explore their many features. Finally, you discover how to weigh the options available among these investments, so that you know how to add them to your portfolio's asset allocation ...