An asset class refers to a group of securities that share similar characteristics or properties. 

For example, stocks are a group of securities that represent ownership of companies, tend to be volatile, and have had relatively high returns over long periods. 

Short-term government bonds are securities that represent a loan to the government that will be paid back with principal and interest, tend to have very low volatility, and correspondingly low returns. 

These two asset classes are distinctly different both in terms of what they represent (ownership versus a loan), the expected return and the level of risk.  Looking at these factors along with how these two types of securities interact with each other form the basis for diversification across asset classes. 

This diversification at the asset class level is called asset allocation.  The two examples listed above are only two of many distinct asset classes.  Among equities, we define asset classes by company size, geographic location, and price factors.  In fixed income, we classify by duration (or term), credit quality, and structure.

Once we have established asset classes, identified their expected returns, expected volatility and relationship with each other (correlation), we use models to find the optimal mix of these assets for each client.

We believe that asset allocation is the most important decision that an investor must make when creating a portfolio.  Numerous academic studies have demonstrated that asset allocation policy is a critical factor, whether you are measuring the variability of returns over time or the level of return. 

Acropolis Investment Management is a St. Louis based fee-only asset management firm, staffed with dedicated financial professionals ready to work with you to reach your investment goals.  Whether you are looking to start your retirement planning, need help with your portfolio asset allocation or rolling over your IRA or 401K we are here to help. To learn more about our financial planning services, please contact us at 1-888-882-0072.