Asset Classes Explained | The Motley Fool

All About Asset Classes and Investment Diversification

By Catherine Brock – Updated Feb 26, 2025 at 10:04 AM

Key Points

Understanding asset classes aids in tailoring portfolio risks and growth potential.
Diversifying investments across asset classes mitigates risk and impacts growth potential.
Effective portfolio diversification should balance multiple asset types and industries.

The asset classes have no teacher and no grading system, but they are the subject of an important lesson for investors. When you know how to combine asset classes within your investment portfolio, you can tailor your risk and growth potential to suit your needs.

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An infographic explaining the four asset classes: cash, equities, fixed income and alternative investments. — Image source: The Motley Fool

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Table by author.
Asset Class	Risk of Loss (Risk)	Growth Potential (Reward)
Cash and cash equivalents	Very low	Very low
Equities	High	High
Fixed income	Low	Low
Alternative	Varies	Varies

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Table data source: Author calculations.
Portfolio	Portfolio Value Pre-Crash	Portfolio Value Post-Crash
100% S&P 500 Fund	$100,000	$70,000
80% S&P 500 Fund 20% Cash	$100,000	$76,000
60% S&P 500 Fund 40% Cash	$100,000	$82,000
40% S&P 500 Fund 60% Cash	$100,000	$88,000

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The bottom line on asset classes and investment diversification

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To wrap this up, here's some homework for you. Review what you know about these five investment vocabulary words: asset class, correlation, diversification, unsystematic risk, and systematic risk. Then think about how to apply these concepts to your own investment portfolio. You'll know you've passed with flying colors when you're comfortable with your portfolio's risk and excited about its growth potential.

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About the Author

Catherine grew up in Southern California wearing a lot of black and trying to perfect the art of sarcasm. Prior to joining The Fool as a contract writer, Catherine was climbing the corporate ladder in marketing roles and dabbling in too many side hustles. When she's not writing, she can be found riding a horse in the country or shopping online for clothes.

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@catherinejbrock

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