Investments Risk -

Investments Risk

Risk can be categorised from low to very high. The higher the risk the higher the chance of you loosing or winning with your investment.

Risk Categories

After deciding how much risk is acceptable in your portfolio by acknowledging your time horizon and bankroll, you can use the risk pyramid approach for balancing your assets.

This pyramid can be thought of as an asset allocation tool that investors can use to diversity their portfolio investments according to the risk profile of each security. The Pyramid, representing the investor's portfolio, has three distinct tiers:

  1. Summit - Reserved specifically for high-risk investments this is the smallest area of the pyramid (portfolio) and should consist of money you can lose without serious repercussions.
  2. Middle Portion - This area should be made up of medium-risk investments that offer a stable return while still allowing for capital appreciation. Although more risky than the assets creating the base, these investments should still be relatively safe.
  3. Base of the Pyramid – The foundation of the pyramid represents the strongest portion, which supports everything above it. This area should consist of investments that are low in risk and have foreseeable returns. It is the largest area and comprises the bulk of your assets.

Although this chart is by no means scientific, it provides a guideline that investors can use when picking different investments. Located on the upper portion of this chart are investments that have higher risks but might offer investors a higher potential for above-average returns. On the lower portion are much safer investments, but these investments have a lower potential for high returns.