Asset Categories

Assets are claims on cashflows (interest, rent, profits) or on scarcity (raw materials, collectibles). Returns split into yield (income you receive now) and growth (changes in those cashflows over time). Market prices also swing around fair value—those cyclical variations don't create lasting wealth unless they're harvested thoughtfully.

Total Return ≈ Yield (today's cashflow) + Growth (change in cashflow) ± Revaluation (price cycle)

Understanding how each asset is valued—what's sustainable versus what drives price variation—lets you choose a mix that fits your return, risk, and liquidity needs.

Scope (mainstream categories):

Cash — Bank accounts, term deposits. (Yield only; very stable prices.)
Credit — Secured loans, usually variable rates. (Yield + some spread risk.)
Bonds — Loans with fixed interest. (Yield + rate-driven price moves.)
Property — Leasable real estate, often residential. (Rent yield + growth + cap-rate cycles.)
Equities — Shares in company earnings. (Dividends + earnings growth + valuation swings.)
Commodities — Materials like gold. (No intrinsic yield; price driven by cycles/scarcity.)
Speculatives — Non-earning assets (e.g., crypto, collectibles). (Narrative/liquidity-driven.)

Risk-Return Relationship

When markets decide what to pay for an asset, they weigh risk against return: the higher the chance of loss, the higher the return investors demand. In this guide, Risk % means the plausible 12-month downside you should be prepared to tolerate; the Return % is the long-run total return you'd reasonably target. The RBA cash rate acts as Australia's risk-free anchor—when it rises, investors expect higher earnings from all other assets, and prices adjust so that expected returns step up accordingly.

RBA Cash Rate: 4%

0% 6%

Risk & Return Characteristics

Asset Type	Risk Level	Expected Return	Key Risks	Liquidity	Tax Treatment
Cash	Very Low	3-4%	Inflation risk	Excellent	Interest taxed as income
Credit	Low	4-6%	Credit risk, interest rate risk	Good	Interest taxed as income
Bonds	Low-Medium	4-7%	Interest rate risk, credit risk	Good	Interest taxed as income
Property	Medium	6-9%	Market risk, liquidity risk, interest rate risk	Poor	Rent as income, CGT on gains
Equities	Medium-High	8-12%	Market risk, sector risk, currency risk	Excellent	Dividends as income, CGT on gains
Commodities	High	Variable	Price volatility, storage costs	Good	CGT on gains
Speculative	Very High	Highly Variable	Extreme volatility, regulatory risk	Variable	CGT on gains

Fundamentals: earnings first, cycles second

Fundamentals means pricing an asset by what it can pay you over time, not by short-term ups and downs. Think of it as "what does this thing earn, and how much is that worth today for the risk I'm taking?"

Two parts anchor the price:

Earnings (often called yield): the cash you get now — interest, rent, or company profits paid out.
Earnings growth: how that cash can grow in the future.

Where does growth come from at the whole-economy level?

Inflation: prices rise over time, so the same asset can charge more (for example, rents stepping up each year).
Real economic growth: often driven by population growth or innovation; which means companies are selling more products at a lower cost, and profits increase.

Revaluation (the cyclical layer)

Even if earnings don't change, prices can still move when the backdrop changes.

Interest rates: when the RBA cash rate and borrowing costs fall, people are willing to pay more for the same earnings; when rates rise, they pay less.
Supply & Demand: for investments, supply often refers to the supply of money. Extra money in the system from government spending or central bank policies can push up asset prices.
Sentiment: booms and busts happen when people get too optimistic or too fearful.

Rate sensitivity by asset (quick guide):

Cash and floating-rate loans: prices don't really move; the interest you earn just resets.
Fixed-rate bonds and fixed-rate credit: prices move with interest rates (the longer the payback, the bigger the move).
Property: quite sensitive, because borrowing capacity and "cap rates" shift with interest rates.
Equities: somewhat sensitive to rates, but results vary because company profits can rise or fall at the same time.
Commodities: mostly driven by supply, demand, and inflation rather than interest rates directly.

Example: Interest rate impact on asset prices

Perpetual Bond

If you spend $100 on a 5% perpetual bond, which pays out $5 every year forever, then interest rates drop to 4%; what would someone have to pay you to own your bond?

They would compare it to a bond which they can buy today; at 4% they would need to buy $125 worth of bonds to get $5 every year. A 25% increase.

New Price = Old Price × Old Interest ÷ New Interest

Property

Residential interest rates are generally 2% above RBA rate.

New Price = Old Price × (Old RBA + 2%) ÷ (New RBA + 2%)

$100 × (5% + 2%) ÷ (4% + 2%) = $116.6. A 16% increase

10-Year Bond

Bonds are not perpetuity investments, they generally last around 10 years. Due to this there is a damping effect on the price impact as you will get the $100 back after the end, not the $125 in the first example.

A rough estimate is New Price = Old Price × (RBA + 10%) ÷ (RBA + 10%)

$100 × (5% + 10%) ÷ (4% + 10%) = $107. A 7% increase

Equities

Equities have a similar relationship, but it's much harder to quantify as other fluctuations occur during interest rate changes which can offset the impact of decreasing interest rates. For example, interest rates are generally decreased when the economy is struggling, which means earnings are probably down already.

Asset Analysis

Detailed breakdown of earnings, growth factors, and valuation variations across asset categories

Asset Category	Asset Types
Asset Category	Cash	Credit	Bonds	Property	Equities	Commodities	Speculative
Earnings
Base RBA	4%	4%	4%	4%	4%	-	-
Margin	-1%	3%	1%	-	1%	-	-
Expenses	-	-	-	-1%	-	-	-
Total Earnings	3.0%	7.0%	5.0%	3.0%	5.0%	0.0%	-
Earnings Growth Factors
CPI	-	-	-	4.50%	2.50%	4.50%	-
GDP Growth	-	-	-	-	2.5%	-	-
Total Earnings Growth	0%	0%	0%	4.5%	5.0%	4.5%	-
Total Sustainable Return	3.0%	7.0%	5.0%	7.5%	10.0%	4.5%	-
Revaluation
Interest Rate	-	-	1/i + 10	1/i + 2	-	-	-
Money Supply	-	-	-	-	±30%	±20%	±80%
Sentiment	-	-	±5%	±10%	±50%	±10%	±100%

Legend:

Base RBA: Reserve Bank of Australia cash rate baseline
Margin: Additional return above/below base rate
Expenses: Ongoing costs (management, maintenance, etc.)
CPI: Consumer Price Index inflation impact

GDP Growth: Economic growth contribution
Earnings Growth: Asset-specific growth factors
Interest Rate: Sensitivity to rate changes (i = interest rate)
Sentiment: Market psychology impact range

Liquidity Management

Liquidity refers to how quickly and easily you can convert an investment into cash without significantly affecting its price. Balancing liquidity needs with return optimization is crucial for building wealth effectively.

High Liquidity Assets

Cash and savings accounts
Government bonds
Large-cap stocks
ETFs

Can be sold within days with minimal price impact

Low Liquidity Assets

Private equity
Direct property
Private credit
Alternative investments

May take months or years to sell, with potential price discounts

Liquidity Ladder Approach

Maintain a ladder of liquidity: immediate cash for emergencies (3-6 months expenses), short-term liquid investments for planned expenses (1-2 years), and longer-term investments for growth (5+ years).

Risk Management

Understanding different types of risk helps you make informed decisions about your investment portfolio and optimize risk-adjusted returns.

Market Risks

Market Risk: Overall market movements affect all investments
Interest Rate Risk: Bond prices fall when rates rise
Inflation Risk: Purchasing power erosion over time
Currency Risk: Exchange rate fluctuations for international investments

Specific Risks

Credit Risk: Issuer defaulting on payments
Liquidity Risk: Cannot sell when needed
Concentration Risk: Too much in one investment
Regulatory Risk: Changes in laws or regulations

Risk Management Strategies

Diversification

Spread investments across different assets, sectors, and geographies

Asset Allocation

Balance between growth and defensive assets based on risk tolerance

Rebalancing

Regularly adjust portfolio to maintain target allocation

Cash Optimization

Cash serves multiple purposes in a well-structured portfolio: emergency fund, opportunity fund, and portfolio stability. However, holding too much cash can significantly impact long-term returns.

Cash Allocation Strategies

Emergency Fund

3-6 months of living expenses in high-interest savings account for unexpected expenses or job loss.

Opportunity Fund

Additional cash to take advantage of market opportunities or investment opportunities that arise.

Cash Alternatives

High-Interest Savings: 4-5% p.a. with full liquidity
Term Deposits: 5-6% p.a. with fixed terms
Money Market Funds: 4-5% p.a. with daily liquidity
Offset Accounts: Effective rate equals mortgage rate

The Cash Drag Effect

Holding excess cash can significantly impact long-term returns. If you hold 20% cash in a portfolio that otherwise returns 8%, your effective return drops to 6.4%. This "cash drag" compounds over time and can cost hundreds of thousands in retirement.

Key Concept

Risk‑ & Liquidity‑Adjusted Return (RLA)

Your optimal sequence depends on your risk tolerance and liquidity needs. Track your personal RLA return—how much progress you make toward goals after accounting for risk taken and cash access required—rather than chasing headline returns alone.

Academy Menu