Traditionally asset classes are normally classified as equities, fixed interest, cash and property. Although it is now common to include such asset classes as commodities and alternative strategies such as absolute return funds in a diversified portfolio.

Asset allocation is the process of dividing your money amongst these different asset classes according to your investment objectives and attitude to risk.

The more broadly invested, or ‘diversified’, your portfolio is, then the less likely you are to be hurt by the poor performance of a single investment or asset class. It is also a good idea to try to diversify into asset classes that react differently to the same events.

 Assets which react in the same way to the same economic conditions are said to be correlated, assets which react in different ways to the same conditions are said to be uncorrelated. Investing in uncorrelated assets helps to reduce the risk associated with a particular event.