• What is an asset class?
• What asset classes are there?
• How do asset allocation and diversification work?
• Which key figures help to evaluate asset classes?
• What are the limits of asset allocation?
• What conclusions can be drawn about the importance of asset classes?

In finance, an asset class refers to a group of assets or financial instruments with similar characteristics. For example, the equity class includes all securities that securitize participation rights in companies. Bonds (government or corporate bonds) form a separate class with fixed interest payments. Each asset class has a characteristic risk/return profile. Classes with higher returns are usually associated with greater price fluctuations. Classes with more stable returns are associated with lower risk. Distinguishing the asset classes helps investors to structure their portfolio in a targeted manner. This is done in line with their personal or professional objectives and risk appetite.

Traditional asset classes include equities, bonds and money market instruments. Equities enable long-term growth, as investors participate in rising company values. Bonds (fixed-income securities) offer predictable interest income and have a stabilizing effect, particularly in uncertain phases. Money market instruments, such as overnight or fixed-term deposits, are very safe and highly liquid. They currently only offer low returns. These main classes form the basic framework of a balanced asset allocation. They are supplemented by alternative asset classes that offer additional diversification effects. These include commodities. Precious metals such as gold or energy commodities such as oil often serve as a hedge against inflation. Volatility strategies are funds that specifically focus on price or volatility fluctuations. Currencies can also be regarded as a separate class, as they have their own price influences independent of equity and bond markets. In summary, key asset classes such as equity, bond, money, commodity, currency and volatility strategies fulfil a specific function in the portfolio. They range from growth potential to risk management.

Asset allocation, i.e. the strategic distribution of assets across different asset classes, plays a key role in determining the risk/return profile of a portfolio. A skilful combination of high-yield and stabilizing classes enables a balance to be struck between potential returns and security. It is therefore important for the overall portfolio that the asset classes do not all react in the same way to market impulses. Diversification is a key principle in this context. Investors spread their assets widely in order to avoid cluster risks. A well-known investor motto is therefore: "Broadly diversified, never regretted." This refers to the broad diversification of assets within and between different asset classes.

A key factor here is the correlation effect between the classes. Historically, some asset classes tend to move in opposite directions. For example, there are negative correlations between equities and other investments. If the equity market falls, bonds, volatility investments or commodities (e.g. gold) can often rise. Such opposing movements dampen the fluctuations in the overall portfolio. In practice, investors make targeted use of these effects by allocating capital in such a way that price falls in one class are mitigated by gains in another. Overall, the following applies. Only with a clever asset allocation and sufficient diversification can fluctuation risks be reduced and stable returns achieved at the same time.

The importance of individual asset classes depends heavily on the type of investor. Actively oriented investors who want to optimize return opportunities over time or buffer risks change their asset allocation more frequently. This is referred to as tactical asset allocation (TAA). It is used to make adjustments to the medium and long-term strategic asset allocation (SAA).

Liquidity is particularly important for tactical allocation. It allows investors to react flexibly to market movements or changes in the economic environment through active management. A well-diversified multi-asset portfolio creates flexibility here. The cornerstones of a successful multi-asset approach are activity, diversification and flexibility. These values bring long-term benefits to security-oriented investors in particular, provided the respective fund makes optimum use of these three guidelines. 

In short, the strategic asset allocation should correspond to the medium to long-term personal or professional objectives. It should be adjusted if these change. Tactical asset allocation can be used to react to changes, e.g. in the market or the economy.

• Correlation. This measure shows how strongly two asset classes rise or fall together. A negative correlation, e.g. between equities and equity volatility or gold, can offset losses in one class with gains in another. The correlation thus helps to limit the overall risk in the portfolio. 

• Risk-return profile. This describes the ratio of expected returns to the risk, usually measured in terms of volatility, of an asset class. Each class has its own risk-return profile. It indicates to investors whether it is more suitable for pure growth or for stabilizing the portfolio. A high Sharpe ratio, i.e. a return adjusted for volatility, indicates that a class delivers an attractive return with comparatively moderate risk. 

• Liquidity. This key figure indicates how quickly an investment can be converted into cash. Money market instruments are considered very liquid, as they can be sold at any time. Real estate or certain alternative investments can only be traded at short notice to a limited extent. High liquidity makes a class versatile, especially if investors want to take advantage of short-term market opportunities. This can be part of a tactical asset allocation or linked to planned redemptions. 

A well-thought-out allocation of asset classes is an important basis for investment success. When allocating assets, however, it is crucial not only to look at the generic terms of the asset classes (such as "equities", "bonds", "commodities"). It is also necessary to look at the individual components of these classes. The same terms can conceal very different opportunities and risks. Here are four reasons why this is so important, including an explanation: 

1. Asset classes are not homogeneous 
Within each overarching asset class, there are enormous differences in the risk-return profile. Examples: 

• A US technology equity fund is more volatile than a global value fund.

• High yield bonds have a very different risk profile to investment grade bond funds.

2. Recognize and avoid hidden cluster risks 
A portfolio with 30 percent "equities" is not automatically well diversified. For example, 80 percent of it could be in US tech stocks. Or all companies could be dependent on a single economic driver (e.g. interest rate policy, energy prices). A look at the weighting of the top 10 positions can help. Even large indices repeatedly exhibit considerable concentration and cluster risks. A precise analysis within the asset classes helps to identify such concentrations. They can cause major losses in times of crisis.

3. Correlations vary greatly within classes 
The interdependence (correlation) of assets is a key criterion for diversification. It can fluctuate greatly within a class. Emerging market bonds in local currency, for example, behave very differently to short-dated German government bonds. A detailed view allows portfolio risks to be managed more precisely and real diversification to be achieved.

4. Successful allocation needs details
If you want to strategically hold 10% in bonds, for example, you need to know whether they are defensive (e.g. close to the money market) or income-oriented (e.g. high yield or CoCo funds).

Interim conclusion. Deciding which asset class to invest in is only the first step. The decisive effect on risk, return and diversification only arises from the specific selection within these classes. Those who look into the substructure make more informed decisions, recognize correlations better and create the basis for a robust, adaptable and high-yield allocation.

Asset classes form the foundation of every professional investment strategy. The targeted combination of different classes significantly determines the risk/reward profile of a portfolio. According to studies, over 40 percent of investment success depends on this selection. Only those who broadly diversify their investment capital and consistently adapt the portfolio structure to their own risk profile can cushion setbacks in difficult phases and achieve stable returns in the long term. It is important to analyze the investment structure in depth. Not all shares are the same and not all bonds are the same. 

Overall, it is clear that the right asset allocation and in-depth analysis of the allocation components against the background of the investment time horizon and investment objectives are the decisive keys to successful investments.