When constructing a portfolio, there are two major steps you have to take. The first is deciding which asset classes to include in your portfolio. This is followed by determining the proportion each asset class will comprise. This is known as asset allocation and is based on your financial and personal circumstances, investment objectives, time horizon and attitude to risk. In this chapter, we explain the attributes of the main asset classes. Traditionally, private client portfolios have comprised equities, fixed interest (bonds), property and cash. Over the past few years, however, there has been increasing awareness of the benefits of “alternative” investments such as hedge funds, commodities and private equity. 

This chapter is not a comprehensive description of each asset class but is designed to give you a flavour of their attributes and characteristics. It is important to remember that each asset class is not a homogeneous group and the risk reward characteristics varies within each sub-group.