Working out the investment risk of a portfolio is an important aspect of the job. It will help you to know your future plans and will change the strategy you have in place. But after deciding on the how much risk is acceptable you can move into using the risk pyramid. This will help balance your assets and gain more control.
The risk pyramid can be looked at as an asset allocation tool. It has three tiers and can help to diversify an investor’s portfolio.
- The base of the pyramid represents the investments which support the items above. They should be low risk investments and have returns which are easily predicted. These include government bonds and money market/bank accounts.
- The middle section of the pyramid will include the medium risk investments. These offer a stable return but will continue to allow for capital appreciation. They should be relatively safe, but riskier than those below. These include investments in real estate and equity mutual funds.
- The highest point of the pyramid will contain the high risk investments. This is the smallest area of the pyramid and there should be less of these in the portfolio.
This layout is just an example and the risk pyramid should be customized to your preferences. Those with more interest in high risk investments can increase the summit of the pyramid, but should take away only enough below to cope with the risk.
At Winflow Financial Group, our consultants help entrepreneurs with our experience. Tell us about your business or investment today and find out how we can help your business save money and grow.