What is an asset class, really?
The term refers to a group of assets with similar exposure to the fundamental drivers of the economy, of which only a handful really make a difference
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TODAY, diversification and alternative returns are our top portfolio concerns. Why? Because low interest rates may have driven valuations of stocks, bonds, and other asset classes to unsustainable heights, so we're forever on the lookout for uncorrelated assets to incorporate into our portfolios.
And of course, product providers are all too happy to accommodate us, touting everything under the sun as a new asset class that can diversify risk.
But let's take a step back and consider what an asset class is in the first place. There is no universally accepted definition. Some describe it as a financial asset with certain cash flows. But then commodities wouldn't qualify. So maybe an asset class has to pay a risk premium. But then cash and money market investments wouldn't count either.
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