What is an Investment Pyramid
An investment pyramid is a portfolio strategy that allocates assets according to the relative risk levels of investments. The bottom of the pyramid is comprised of low-risk investments, the mid-portion is composed of growth investments and the top is speculative investments. The risk of an investment is defined by the variance of the investment return, or the likelihood the investment will decrease in value to a large degree.
Explaining the Investment Risk Pyramid
BREAKING DOWN Investment Pyramid
An investment pyramid strategy builds a portfolio with low-risk investments as the base, equity securities of established companies as the middle, and speculative securities as the top. The base (the widest part of the pyramid) would contain government bonds and money market securities, stocks would make up the middle of the pyramid and then the top would be options and futures. Thus, the higher you go up the pyramid, the greater the risk and the potential return.
Example of an Investment Pyramid
As an example, Harold went to his financial advisor for advice on how to position his portfolio. The advisor suggested that based on Harold's goals, risk tolerance and time horizon, he should adopt an investment pyramid strategy. The advisor suggested Harold put 40-50% of his portfolio in bonds and money market securities, 30-40% in equities and the rest in speculative items such as derivatives and futures.