2009-03-06

Using the investment pyramid to build portfolio

A portfolio that's right for someone else may not be best for you. The factors that make a difference are:

· Your age
· Your goals, or what you want to accomplish by investing
· The time frames for your various goals
· Your attitude toward risk—or what's called your risk tolerance.

One should also understand the ideas of asset allocation and diversification. Only then should you consider what your investment choices are and how different types of investments put your money to work.

Once you choose your asset mix, you’re ready to pick specific investments. The investment pyramid shows you have many choices within each asset class.

Using the investment pyramid
· The chart arranges various investment choices according to the risk-reward relationship.
· The higher the investment is located in the pyramid, the higher the potential return, and the higher the risk.
· Since cash and cash equivalents offer the lowest risk and return, you will find them at the bottom of the pyramid.
· Mutual funds are included in all categories because there are many different kinds of mutual funds. Each fund has its own level of return and risk.
· The classification of a stock as low, moderate or high risk depends on your point of view. What seems risky to you may not seem risky to the next person.
Note: The types of investments listed under each section of the pyramid are only a framework. The risk of each investment varies with economic conditions.

What should I ask before I buy any investment?


· Do I understand how this investment works?
· Do I have good information about how this investment has done in the past?
· Do I understand the costs of this investment and the risks?
· Am I looking for safety, income, or growth from this investment?
· Do I have good information about how this investment is likely to do in the future?
· How much can I hope or expect to make?
· What other investments do I have already? Do I want to invest in more of the same or do something new?
· How long do I plan to invest (my time horizon)?

3 comments:

  1. This is very interesting I had never heard it called this before. I but it is quite true the you should diversify your holdings.

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