A Penny Saved

If you’re unfamiliar with the Investment Pyramid, it is very similar to the food pyramid.  At the base of the pyramid are the investments that you should have more of and as you move up the pyramid, the risk rises and those investments should make up a lesser percentage of your portfolio.

It looks something like this. This example is a fairly simple pyramid.  There are no explanations as to what the investments are that make up each teir.  Stealth Bucks wrote an article on the investment pyramid and linked to another pyramid that is much more explanatory.  Unfortunately, it’s not so much a graphical representation as it is a textual pyramid.  It can be seen here.  It basically splits the pyramid up in the same way as this example, however it gives examples of the investments in each group.

In and of itself, the pyramid is a sound indicator.  Your portfolio as a whole should end up in roughly the ratios that are suggested by the pyramid.  However, for many of us who are younger, it’s ratios are way off.  None of us will retire if we have a majority of our investments in the Cash and Bonds earning 1% to 8%.  While the ratio for the speculative and extreme risk investments are probably universally spot on, for a younger investor, a portfolio should be heavy in stocks.

For that reason, a younger investors triangle should move the Stocks/Growth/Income portion to at least one spot lower on the pyramid.

The investment pyramid is not bad advice.  But any investor must keep in mind that things like this are created with the masses in mind.  Each and every one of us should decide just how much risk we are willing to endure in our investments and create our own investment pyramid from there.

What would your investment pyramid look like?  Do your investments match that?

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