Asset allocation in a nutshell

Source: Wikipedia

The best-performing asset varies from year to year and is not easily predictable. A mixture of asset classes is more likely to meet your goals.

Different asset classes offer non-correlated returns. Diversification reduces the overall risk in terms of the variability of returns for a given level of expected return. Diversification is "the only free lunch you will find in the investment game."

Academic research has shown the importance of asset allocation, and the problems of active management. This explains the steadily rising popularity of passive investment styles using index funds.

Here are the asset classes:

* cash (i.e., money market accounts)
* Bonds: investment grade or junk (high yield); government or corporate; short-term, intermediate, long-term; domestic, foreign, emerging markets
* stocks: value or growth; large-cap versus small-cap; domestic, foreign, emerging markets
* real estate
* foreign currency
* natural resources
* precious metals
* luxury collectables such as art, fine wine and automobiles
* other