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)?

Five basic steps in investing

Investment is important in life. Before investing, there’s a lot to figure out and we have to prepare well. If you have a plan to follow, you’ll know better what to do with your money and you’ll worry less. Generally, there are five steps to plan your investments

1. Set your goals
Figure out:
What are my top financial goals?
When do I hope to reach those goals?
How much money do I want to save?

2. Find out what kind of investor you are
Figure out:
How do I want to approach investing?
How important is it to me to keep my money safe?
How comfortable am I with the idea that I may sometimes lose money if I want to grow my savings faster?
How important it is to me to make a good return on my investments?

3. Pick a mix of investment types
Figure out:
What types of investments do I understand and want to buy? Some types of investments may grow faster than others. A good mix of different investments (your asset mix) will help you get enough growth, while keeping losses in balance.
Am I comfortable choosing my own asset mix? If not, get some expert advice.

4. Choose specific investments
Once you know your asset mix, you can choose specific investments of each type.
Do a lot of research before you decide. Look at how an investment has done in the past and how well it may do in the future.
Again, many people get expert advice.

5. Keep track of your investments
Keep good records of your investments so you will know how well each one does.
If you have an adviser, check that he or she is following your investment instructions.