Understanding Asset Class Relationships

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Understanding Asset Classes

Whether you’re a sophisticated investor or a novice dipping your toe in the water for the first time, it’s crucial to understand how different asset classes can help you achieve your investment and lifestyle goals.

An asset class is a specific category of assets or investments which have similar characteristics including risk and return expectations.

The four main asset classes are shares (securities in a company), fixed interest (bonds and securities), cash (term deposits and property).

Asset classes also fall into two main categories – growth and defensive. They will perform differently depending on the underlying economic conditions at any given time. And some will be better suited to your needs than others.

For example, you might want your investments to provide you with a regular source of income, or you might be looking to generate long-term capital growth. You might have a low tolerance for risk, or you might want ready access to your money.

When you understand the pros and cons of each asset class, you will be able to make more informed investment decisions that suit your wealth management and lifestyle goals.

Growth assets

Growth assets focus on generating capital growth and income. They are suited to investors looking to grow their investment over the long term – usually seven to ten years. They include shares, property and alternative investments.

Growth assets tend to have higher levels of risk, but they also potentially deliver higher returns than defensive assets over longer investment time frames.

Shares: Also known as equities or stocks, shares are securities that give investors part ownership in a publicly listed company.

If the company performs well, you can benefit from share price growth (capital growth) and receive income paid as dividends. But if the company performs poorly, your shares could fall in value and there may be no dividend payments.

Because share prices fluctuate daily and react to short-term market volatility, it’s worth holding shares for at least five to seven years to maximise returns.

You can choose to invest in Australian shares, international shares or a mix of both.

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When you understand the pros and cons of each asset class, you will be able to make more informed investment decisions that suit your goals.

Property: Property can include investments in direct property, global property, listed real estate investment trusts (REITs) and other property securities.

Property is considered a growth asset because the value of residential, commercial and industrial property can increase substantially over the medium-to-long term, generating higher returns than cash or fixed interest.

But just like shares, property can also fall in value with the risk of losses. REIT unit prices, for example, can fluctuate based on underlying property fundamentals or share market volatility.

Defensive assets

If you’re looking for more stability, defensive assets are considered lower risk and will generally generate income more consistently. They include investments like cash and fixed interest.

Because defensive assets tend to have lower risk levels, they generate lower returns over the long term compared to growth assets.

Cash: Cash investments include short-term bank deposits, 90-day bank bills and high yield savings accounts.

Cash is a defensive asset because it provides a stable, low-risk income in the form of regular interest payments. The beauty of cash is that it is highly liquid and has less capital risk than growth assets, which is important when it comes to protecting wealth.

But cash also has one of the lowest potential returns of all asset classes, particularly in a low interest rate environment.

Fixed Income: Fixed interest investments include government and corporate bonds, debentures and mortgages and might suit you if you’re looking to invest over a one to three-year timeframe.

When governments or companies issue a bond they are effectively borrowing money from investors. In return they pay investors a regular rate of interest (an income stream) over the life of the bond with the borrowed amount repaid when the bond matures.

Bonds are considered a defensive investment because they generally offer lower potential returns and potentially lower levels of risk than shares or property. But the income stream from bonds can be higher than earnings from a cash investment.

It’s important to understand that bond prices move in an inverse relationship to interest rates. So when interest rates are declining, bond prices will rise, which often makes them more appealing to investors.

But when interest rates start rising, the market value of bonds falls. That means there’s a risk you could lose some or all of your capital, particularly if the coupon rate of the bond (the fixed periodic interest paid to you) is lower than the official cash rate.

Whatever your wealth management goals are, the key is not to put all your eggs in one basket. Different types of investments and different asset classes will do well at certain times, while others won’t. If your portfolio has some variety, you can rest assured that at least some of your investments are likely to be performing well.

Asset classes explained

Asset classes consist of a group of securities with varying degrees of risk. There are three main asset classes.

  • Equities
  • Bonds (also referred to as fixed income)
  • Cash

Each asset class has different investment characteristics, for example, the level of risk and potential for delivering returns and performance in different market conditions:

Equities

Equities (also known as ‘ordinary shares’, or ‘shares’) are issued by a public limited company, and are traded on the stockmarket. When you invest in an equity, you buy a share in a company, and become a shareholder. Equities have the potential to make you money in two ways: you can receive capital growth through increases in the share price, or you can receive income in the form of dividends. Neither of these is guaranteed and there is always the risk that the share price will fall below the level at which you invested.

Bonds

Perhaps the easiest way to think of bonds is as a loan. They’re issued by companies and governments as a way of raising money. Bonds provide a regular stream of income (which is normally a fixed amount paid at regular intervals) over a specific period of time, and promise to return investors their capital on a set date in the future. Bonds can offer stable returns, and are perceived to be lower risk than equities – although typically deliver lower returns over the long-term. Investing in fixed interest securities issued by companies other than those issued or guaranteed by certain governments, exposes you to greater risk of default in the repayment of the capital provided to the company or interest payments due to the fund. The value of bond investments are sensitive to changes in interest rates.

A cash fund typically invests in a portfolio of cash, short-term deposits, and aims to achieve better rates of interest than bank deposit accounts. A cash investment tends to be seen as a lower risk, lower return option than bonds or equities. It can be a useful tool for very risk‑averse investors or as a temporary home for money in between longer‑term decisions. They aim to achieve a competitive rate of interest whilst maintaining safety and liquidity for investors. Because they generally offer lower rates of return, they are less suitable for investors seeking long-term capital growth.

There are different styles of investing:

Multi-Asset

Multi-asset funds invest across a number of different asset types which may include equities, bonds and cash. This gives you a greater degree of diversification than investing in a single asset class. Diversifying across a broad range of investment strategies, styles, sectors and regions can help cushion the occasional shocks that come with investing in a single asset class. It also enhances the potential for investing in a better performing asset class, while spreading the risk of investing in lower performing asset classes. However, investors should remember that diversification does not fully protect you from market risk.

Absolute Return

In recent years, many investors have turned to absolute return funds. This is a way of investing that aims to generate positive returns in all market conditions. It uses investment techniques that can profit from both the ups and downs in markets and share prices. For many, absolute return investing has come to be seen as an integral part of their portfolio. Please note that there are no guarantees an absolute return fund will achieve its objective.

Class Diagram Example: Understanding Relationships

This is a simple class diagram example that shows the use of associations in relating classes. Different multiplicities are set to the association roles to indicate the cardinality of elements.

You can create your own Class diagram by editing this one. Simply Click Use this Template to start, or click Create Blank to create a new one.

What is Class Diagram?

The class diagram is an important part of the UML, as it captures the static view of the system. The class diagram models classes in the real world and specifies the relationships between them. A class is essentially a template from which any number of objects can be derived. It does not exist as an object in its own right, but it defines the properties (or attributes) that an object will have, and the operations that can be performed by the object. We can also use packages represent groups of related classes and relationships.

How to draw Class Diagram?

The following guideline should be consider while developing a class diagram –

  • Use meaningful name for a class to describe the aspect of the system.
  • If you are involved in a large organization, it is better to refer to the glossary for existing class for reuse and to avoid it end up to be many variants for similar classes that serve the same purpose in the repository
  • Responsibility (attributes and methods) of each class should be clearly identified only in the detailed design phase and it is not necessary to do it in upfront.
  • Refine and elaborate your class model in just-in-time manner and do not rush every detail in the upfront.
  • You don’t have to include all classes in one single class diagram, for example, include only the group of classes that participate in a use case scenarios and no others.
  • Reuse classes by use master view and auxiliary view among different class diagrams.
  • You can also avoid cross relationship link between classes by using auxiliary view of the same class to be appeared within the same class diagram.
  • Package related classes together to enforce software architecture and best practice such as MVC framework.

Why do we need Class Diagram?

Class diagrams are useful in many stages of system design:

  1. Analysis stage – a class diagram can help you to understand the requirements of your problem domain and to identify its components.
  2. Design stage – you can refine your earlier analysis and conceptual models into class diagrams that show the specific parts of your system, user interfaces, logical implementations, and so on.v
  3. Detailed design stage – the class diagrams that you create during the early stages of the project contain classes that often translate into actual software classes and objects when you write code.v
  4. Implementation stage – you can use class diagrams to convert your models into code and to convert your code into models.

Your class diagrams then become a snapshot that describes exactly how your system works, the relationships between system components at many levels, and how you plan to implement those components.

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