In our Guide to Investment Diversification, we consider why diversification is an important part of investing. In practical terms, diversification is holding investments which will react differently to the same market or economic event. Generally speaking, there are four broad asset classes: cash, fixed interest (bonds), property and shares (equities).
Since performance in any one asset class can be unpredictable depending on shifts in the market, investing across several asset classes can provide greater diversification potential. Therefore, if one asset class performs favourably, it can potentially offset another that is performing less favourably, providing more balance to your portfolio when market shifts occur.