Your Investment Pyramid
The above pyramid is the way some professional investors and fund managers design their financial structure. It is the same way a developer would design and build a solid home.
Contrast this with an inverted pyramid. An inverted pyramid is the way of a gambler. A gambler concentrates his assets in high-risk investments such as futures or share margin financing. A gambler hopes to get rich quick. His foundation is like building a home in a flood prone area. It only takes a heavy rainstorm for the house to collapse.
The investment pyramid above illustrates that you should build a firm base before venturing into high-risk instruments such as futures or share margin financing. It also illustrates that the higher the risk of an asset class, the less capital you should allocate. While some main board shares could be riskier than some small capitalisation funds, and it is recognised that there are different types of unit trust funds, some more aggressive than others, the above pyramid serves as a very rough guide to illustrate that there are higher risks associated with different types of products.
At the top of the pyramid are futures, which include crude palm oil and stock index futures contracts. These contracts carry the highest risk so experienced financial advisers think you should only invest 5 % or less of your investment funds in this asset class, and only if you understand what the product is all about.
At the base or foundation of your pyramid are your home, your business and your money market funds. Most (according to financial advisers, perhaps at least 50%) of your assets should be here. Other investments fall in between. Should your high-risk investments fail, at least you will have a foundation to support you and give you a chance to build again.
