The investment pyramid is a concept my father showed me when I was younger. This pyramid shows three different levels of risk and a pyramid showing the different percentage levels affiliated with each risk level. For example if you had $10,000 to invest you would want a larger chunk around $5,500 invested in lower risk investments like CD’s (or any other lower risk investment, but probably not just a savings account). The next level up is the medium risk investment section. You might choose to invest in some medium risk mutual funds because those funds will have a higher return than a CD will have. To prevent yourself from losing all or most of your total $10,000 you’d want to make the medium risk chunk closer to $3,250. At the top of the pyramid is the high risk section. This section has the highest amount of interest you might earn on an investment, but because of its high risk you might want to invest $1,250 (or less) here.

Investing requires you to know where you are comfortable investing, you’ll definitely want to have someone you trust such as a financial adviser who can help you find the right investment in each section. Because my own knowledge is limited it would be unwise for me to invest in things beyond mutual funds at this point in time. By throwing my money at stock or options I might just blow all $1,250.00 because I don’t have competence on that level. Because I can’t babysit various investments due to my full-time work requirements there is greater risk for me to invest in such marketing tools - they’re a double edged sword and if I lose control the blade will cut my investment money rather than increase it.

Another aspect of this pyramid is that differently aged investors may want to adjust the angle of the pyramid, you might feel that at a younger age higher risk investments can take a larger percentage of your total investment strategy because you’ll have more time to recover if the investments go sour. You’ll want to talk to a financial adviser in this case because you’ll need to evaluate your goals.

A look at those numbers will show you the rough percentages that I’ve used:

Low risk: 55%
Medium risk: 32.5%
High risk: 12.5 %

You may want to adjust those numbers in some cases, but that’s for another article

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This entry was posted on Monday, July 2nd, 2007 at 10:14 pm and is filed under Foundations, Investing, Retirement. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.