Financial Risk Cheat Sheet - How To Allocate Your Funds Properly

Hello traders. Here I present to you an important lesson of how we should all be allocating our funds. In the pyramid above, you can see the distribution of risky assets to low risk assets. Low risks are associated with low expected returns while high risks are associated with high expected returns. Investors who are not willing to take high risks have to be contented with lower returns and investors who want to achieve higher returns must be prepared to bear higher risks. This is life - but life is all about taking risks. As there are good stresses and bad stresses in life - there is also good risks and bad risks. Instead of simply saying what's good or bad, I like to use a term called, "calculated risks". By calculating your risks properly, you can learn to allocate your capital and exponentially grow your funds in a longer period of time if you take proper action. Think of this as the food pyramid. Too much sugar can be bad for you. But with just the right amount, it can be beneficial for you mentally.

The Investment Risk Pyramid is an asset allocation theory and I have presented it in an easy visualization in this article. Investors can use in selecting different asset classes to diversify their portfolio according to their risk tolerance and expected returns. I highly advise many to screenshot this and hang it on their walls. It can be a good daily reminder before you press the buy or sell button.

Bottom of the Pyramid: Lower Risk
The base of the pyramid contains the lowest set of risky investments. These investments that have the lowest risk, because, well, they generate the lowest rates of returns. These investments are represented by the pyramid’s wide base as low-risk investments should generally constitute the bulk of your portfolio. These investments include cash and cash equivalents, money market account and money market funds, treasury bills, certificate of deposits as well as high-rated government and corporate bonds.

Middle of the Pyramid: Medium Risk
The middle of the pyramid contains investments of a moderate risk. Although they are riskier than the assets at the bottom of the pyramid, these investments should still be r'elatively' safe as investors all around the world also like to invest into these types of assets. They are the pinnacle of how the economy runs. These investments generally offer a stable return and capital appreciation in the longer term. These investments include income stocks and growth stocks as well as mutual funds, index funds and real estate - all necessities of life in the economy.

Top of the Pyramid: Higher Risk
The top of the pyramid represents high risk investments. These investments may yield large gains but may also yield large losses. Because of their speculative nature, you should only allocate money to high-risk investments if you can afford to lose them without serious repercussions. These investments include futures, options, commodities, penny stocks as well as alternative investments like precious metals and gems, collectibles, peer-to-peer lending and cryptocurrencies.

The most important part of this lesson is how to allocate these funds. It is not bad to invest into risky assets, as long as you are making sure to allocate your funds properly by moving them down the pyramid! For more risk management articles, please check them below! Happy investing and trading!

Trade Safe.
X Force

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