Wednesday, November 24, 2010

Investment Risk Pyramid

After deciding on how much risk is acceptable in your portfolio by acknowledging your time horizon and bankroll, you can use the risk pyramid approach for balancing your assets.

  • An investment pyramid actually represents three levels of investment. At the bottom of the investment pyramid, low risk investment options are placed. 
  • In the middle portion of the pyramid, the investment options have a greater risk associated with them. However, these investment options can give you better financial returns than the extremely low risk ones. 
  • The third and the topmost portion consists of extremely high risk investment options. Though the profit from such investments can be unbelievable, you also stand at a high risk of losing your money due to volatile market conditions and overall nature of the economy. 
Personalizing your Pyramid 
Define the overall parameters of the portfolio. Each investor is different and one investor may not tolerate the same risk as another investor. Those who want more risk in their portfolios can increase the size of the summit by decreasing the other two sections, and those wanting less risk can increase the size of the base.

You must understand your goals, priorities and financial aim in your life and then decide which investment would suit you. The pyramid representing your portfolio should be customized to your risk preference.

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