Investment Pyramid Pdf

[Merja Caryk]

AdamHayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Note that not all investors have the same willingness and/or ability to take on risk. The pyramid representing a portfolio should be customized to an individual's particular risk preference and financial situation.

On average, stocks have higher price volatility than bonds. This is because bonds afford certain protections and guarantees that stocks do not. For instance, creditors have greater bankruptcy protection than equity shareholders. Bonds also provide steady promises of interest payments and the return of principal even if the company is not profitable. Stocks, on the other hand, provide no such guarantees.

In general, investors need to be compensated for additional risk in the form of greater expected returns. In relation to stocks being riskier than bonds, the former also has a higher expected return, known as the equity risk premium. Note, however, that this only applies to investments. Note that a casino game, in contrast to an investment, has a negative expected return. As a result, a gambler who takes on greater risk actually increases their expected losses over time.

Generally, government bonds issued by developed economies are considered the safest investments. In fact, they are sometimes referred to as risk-free, since a government has the option (in theory) of printing more money in order to cover its debts. U.S. Treasuries are therefore among the safest investments around (but often provide the lowest returns because of this fact).

Investment goals will be influenced by your income and job security, your risk tolerance and your age. In addition, the time you have to achieve your goals should influence the kinds of investments you consider.

Once you have determined your needs and tolerance for risk you are ready to take a look at different investments. Make sure that your risk tolerance and your investment strategy match. Investment goals can be:

Such a short time horizon suggests that the stock market wouldn't be a good place to invest the money you're setting aside for the trip. The market is subject to wide swings, and you wouldn't want to be forced to sell your stocks in a downswing just because the time had come to buy your airline tickets. Don't put into the stock market any money that you know you will need in the next two or three years. Low-risk vehicles such as certificates of deposit, for example, that mature about the time you'll need the cash, or a money-market fund that allows you to withdraw your cash instantly by writing a check, may be a better choice.

With more time, you have more flexibility. Safety is of course still a priority, but you are in a better position to ride out bad times in the financial markets and take on a little more risk. For medium-term goals like these, longer-term CDs that pay more interest than the short-term certificates that you would buy to help finance your vacation trip, or conservative mutual funds, may be appropriate.

For long-term goals, the range of possibilities is somewhat wider: for example, stocks, corporate and government bonds, long-term CDs, mutual funds. You should also take maximum advantage of tax-sheltered plans, such as individual retirement accounts (IRAs) and 529 college savings plans. IRA earnings accumulate tax-deferred, and contributions may be tax-deductible. 401(k) plans provide many of the same advantages and might offer a company match that will help you reach your goal.

Your goals are likely to change, so it's important to reassess them at least annually. For instance, the kinds of growth-oriented investments that might be appropriate while you are accumulating a retirement nest egg and have a long-term horizon could be inappropriate after you retire and need income to pay the bills. There are many resources -- magazines, newspapers, books, the Internet, financial advisers -- that can help you decide how to modify your portfolio as your circumstances change.

The pyramid is a useful visual image for a sensible risk-reducing strategy. It's built on a broad and solid base of financial security: a home; money in insured savings accounts or certificates; plus insurance policies to cover expenses if something should happen to your health, your car, your home, your life or your ability to earn an income. As you move up from the pyramid's base, the levels get narrower and narrower, representing the space in your portfolio that is available for investments that involve higher risk. The greater the risk of an investment, the higher up the pyramid it goes and, thus, the less money you should put into it.

At the very top of the pyramid go the investments that few people should try, such as penny or microcap stocks, commodity futures contracts, promissory notes and most limited partnerships. Most of these lend themselves to manipulation and fraud.

Does this mean you should avoid all high-risk investments? For most people, yes. For someone who wants to take a "high-risk flyer" (an investment in a theatrical production, for example), it means you should confine it to the top of the pyramid - never occupy a significant portion of your investment portfolio. Invest only as much as you can afford to lose because you might in fact lose it. You should also learn to recognize the risks involved in every kind of investment.

Real Estate values go up and down in sync with supply and demand in local markets, regardless of the health of the national economy. Gold and silver, which are supposed to be stores of value in inflationary times, have not fulfilled this expectation. Even federally insured savings accounts carry risks -- that their low interest rate won't be enough to protect the value of your money from the combined effect of inflation and taxes.

It depends on your goals, your age, your income and other resources, and your current and future financial obligations. A young single person who expects his or her pay to rise steadily over the years and who has few family responsibilities can afford to take more chances than, say, a couple approaching retirement age. The young person has time to recover from market reversals; the older couple may not.

Whether you make or lose money in the market depends on how your investments perform. That's what the risk in investing is all about. You can lose money because of the "downs" in the market, but you can also make money on the "ups."

Knowing how different products perform and the risks they represent can greatly increase your chances of choosing good investments. This means you need to take time to understand the various investment products. You need to understand their goals and risks.

If you want your investments to compound more quickly, you don't have to take more risks. What you can do is put money into tax-deferred investments, including individual retirement accounts (IRAs) and salary reduction retirement plans like 401(k)s or Keoghs.

There are drawbacks to tax-deferred investing. Generally, you'll have to pay a penalty as well as whatever tax is due -- if you withdraw money from tax-deferred accounts before you reach 59 1/2. And you usually must take mandatory withdrawals and pay the tax that's due beginning at age 70 1/2.

If you're worried about having enough money when you retire, tax-deferred investing may be the best way to meet your goals. And there are situations when the withdrawal penalty is waived, including serious illness, paying college tuition or putting money down on the purchase of your first home.

Available through banks, savings and loan associations, and other financial institutions; insured by FDIC, a government agency; considered safe and convenient; associated with checking alternatives such as NOW accounts.

Available through many financial institutions and payroll-deduction plans; provide an opportunity for you to invest in the U.S. government by buying a bond with a set maturity date at a price below face value.

While, the most common types of investments or "securities" are stocks, bonds and mutual funds, securities can also include: futures and options, real estate investment trusts, promissory notes, limited partnerships, oil and gas leases and investment contracts.

The investment alternatives listed above are ranked in descending order of the relative safety of these investments -- from low-risk at the top to higher risk at the bottom. Another way of looking at this is to turn the list upside down and imagine it as a pyramid.

We Value Your Privacy

We use cookies to enhance your browsing experience, serve personalized content, and analyze our traffic. By using this website you consent to our use of cookies.

In recent years many companies have successfully utilized so-called "multi-level marketing" practices. It is important, therefore, to address the differences between a pyramid scheme and a legitimate multi-level marketing company. Initially, it should be noted that pyramid schemes always fail, while multi-level marketing companies sometimes survive.

3a8082e126