Investment Pyramid (2024)

Definition and Example of Investment Pyramid

An investment pyramid is a tiered pyramid that helps investors get some context for what the general risk and reward level is for a certain investment. While an investment pyramid can’t predict how well an investment will perform, it can help investors pinpoint what types of investments are likely good fits for their risk tolerance.

  • Alternate name: Investment risk pyramid

For example, the first tier of the pyramid includes savings accounts. As a tier-one investment, savings accounts may be a good fit if you want to avoid risk, because they provide a way for you to gain interest on your savings with virtually no risk. That said, the reward level for a savings account is low. An investor looking to earn better returns may want to consider stocks, which, while riskier, have the potential to net more rewards.


The investment pyramid can help an investor consider these risk and reward factors to make an investment plan they feel comfortable with.

How Does an Investment Pyramid Work?

An investment pyramid has a series of tiers, with the broader bottom tiers offering lower risk and the smaller, higher tiers offering more risk. The number of tiers an investment pyramid has depends on the broker or financial institution making the pyramid. Here is an example of a five-tier investment pyramid:

Tier One

The bottom tier of the investment pyramid represents the investments that have the lowest risk and the lowest rate or return. These are considered to be “safe” investments and include:

  • U.S. government securities: This includes savings bonds, Treasury bills, and Treasury notes and bonds.
  • Federal agency securities: These are debt securities that come from Ginnie Mae, Freddie Mac, and Fannie Mae, and are bought and sold on the stock markets.
  • Saving and checking accounts: Savings and checking accounts are as safe as it gets because they are insured by the FDIC.
  • Certificates of deposit (CD): A CD is an investment that has a guaranteed outcome and a slightly higher interest rate than a savings account.

Money-market funds and fixed annuities could also be considered tier-one or base-level investments. Because the investments in the bottom tier offer low returns in conjunction with low risk, they are in jeopardy of inflation risk.

Tier Two

The second tier of the investment pyramid is made up of low-risk, steady-return investments such as municipal and corporate bonds, preferred stock, and convertible securities. The investments in the second tier are considered to be somewhat safe, but they share the bottom tier’s inflation risk.

Tier Three

Tier three is home to relatively low-risk investments that have a higher rate of return than the bottom two tiers. This tier includes blue-chip stock, growth funds and portfolios, balanced funds and portfolios, and variable annuities. While considered fairly stable, these investments tend to come with a better rate of return than what you’ll find in tiers one and two.

Tier Four

In tier four, you'll find stock and stock funds, including large-, mid-, and small-cap stocks. The small- and mid-cap stocks hold more risk than the large-cap stocks do. Mutual funds also fit into this tier, which allow investors to invest in multiple companies at the same time by purchasing one fund.

Tier Five

The very top of the investment pyramid represents the riskiest investments; options, futures, and speculative stocks and bonds are found here. While the payoff can be big, so can the loss. For example, certain futures contracts can put you at risk of infinite losses.


Some investment pyramids use a three-tier approach, dividing investments into three groups: low-, medium- and high-risk.

Pros and Cons of an Investment Pyramid


  • A good introduction to investment risk levels

  • Provides clarity


  • You make the final investment call and hold all the risk

  • Lacks nuance

Pros Explained

  • A good introduction to investment risk levels: The investment pyramid is a great way to quickly learn more about which types of investments are considered riskier than others.
  • Provides clarity: If you’re struggling to decide how to invest your money, the investment pyramid can help you compare and contrast your options.

Cons Explained

  • You make the final investment call and hold all the risk: The investment pyramid is more of an educational tool; you’re the one who has to make the final decision on how to invest your money, and you will take on all of the risk.
  • Lacks nuance: The investment pyramid can give you a general idea of which types of investments are historically riskier and more likely to generate large rewards, but it doesn’t take into account that all investments are unique.

What It Means for Individual Investors

Investors who are new to investing and aren’t ready to hire an investment advisor can use the investment pyramid to get a sense of what type of investments are good fits for their risk-comfort level. That said, you can’t make an informed decision about how to invest your money simply by looking at an investment pyramid. You also need to do your own research on each investment option you’re considering.

Here are a few questions to ask yourself before you choose an investment vehicle:

  • What kind of yield can you expect from this investment?
  • What is the return you want, and what type of return is common with this type of investment?
  • What is the risk you’ll be taking on?
  • Can you sell or convert the investment into cash if need be, and how much would it cost to sell it?

Key Takeaways

  • An investment pyramid is a visual tool that provides context surrounding which types of investments have more or fewer risks or rewards associated with them.
  • An investment pyramid has tiers that range in risk and reward, with the bottom tier representing the safest investments that also have the lowest chance of rewards.
  • The highest tier typically represents the riskiest investments with the highest potential rewards.
Investment Pyramid (2024)


What is the concept of investment pyramid? ›

The investment risk pyramid is an asset allocation strategy whereby low-risk assets like cash and treasuries are placed at the bottom, and smaller allocations to riskier assets like growth stocks are placed at the top.

What are the four levels of the investment pyramid? ›

It employs a pyramid structure to categorize investment options into four levels: Foundation, Secure, Growth, and Speculative. The pyramid visually depicts the relationship between risk and reward, with higher-risk investments offering the potential for greater returns but also carrying a higher probability of loss.

What is the concept of financial pyramid? ›

The main idea of the financial pyramid that the width of pyramid at a given level expresses how much a person might wisely commit to the investments in that level. That is, more of a portfolio should ordinarily be invested in blue chip common stocks than speculative penny stocks.

What is the investment triangle? ›

Every type of investment can be analysed based on three criteria: returns, liquidity and risk, which are the three points of the investing triangle. As an investor, you are going to attribute importance to each of these three factors depending on your personal risk profile.

How does a financial pyramid work? ›

A pyramid scheme is a fraudulent system of making money based on recruiting an ever-increasing number of "investors." The initial promoters recruit investors, who in turn recruit more investors, and so on.

How to build your financial pyramid? ›

The Financial Planning Pyramid consists of four layers: Base Layer: Emergency Funds and Insurance. Second Layer: Debt Management, Third Layer: Core Investments, and Fourth Layer: Speculative Investments.

Which investment would most likely top an investment program pyramid? ›

At the top of the pyramid with the highest risk and highest potential for return are commodities, followed by antiques and collectibles, real estate, stocks, mutual funds, corporate bonds, Treasury securities or government bonds, certificates of deposit, and savings accounts.

What is pyramid theory in stock market? ›

Pyramid trading strategy involves adding more shares of an asset during a strong upward trend. It is Advisable for experienced traders due to its high risk nature. Typically applied when stocks demonstrate strong bullish behavior or show upward potential.

What are the 5 stages of investing? ›

  • Step One: Put-and-Take Account. This is the first savings you should establish when you begin making money. ...
  • Step Two: Beginning to Invest. ...
  • Step Three: Systematic Investing. ...
  • Step Four: Strategic Investing. ...
  • Step Five: Speculative Investing.

Are financial pyramids illegal? ›

Pyramid schemes are illegal under state and federal law. If the plan's way of making money is based not on selling a product or a service, but on recruiting new members into the plan in order to get paid, it is an illegal pyramid.

What is the biggest financial pyramid in the world? ›

Madoff Investment Securities. It was the largest pyramid scheme in history, disguised as an investment fund.

How to build a wealth pyramid? ›

When building your pyramid, the base is all about financial protection. This means taking care of your daily expenses, housing and transportation, with a focus on survival through stable cash flow and debt management (such as paying off credit card debt).

What is the pyramid model of investing? ›

An investment pyramid, or risk pyramid, is a portfolio strategy that allocates assets according to the relative risk levels of those investments. The risk of an investment is defined in this strategy by the variance of the investment return, or the likelihood the investment will decrease in value to a large degree.

Which investment has the highest risk according to the investment pyramid? ›

Growth investments are for long-term investing. Growth investments usually carry a higher risk than either safety or income investments. Speculation is the riskiest investment. With the high risk usually comes the possibility of higher gains.

What is a golden triangle in stocks? ›

The Golden Triangle (Long Entry) strategy is a moving average based technical indicator developed by Charlotte Hudging in attempt to identify promising entries on stock charts.

What is the concept of a pyramid? ›

A pyramid has a polygonal base and flat triangular faces, which join at a common point called the apex. A pyramid is formed by connecting the bases to an apex. Each edge of the base is connected to the apex, and forms the triangular face, called the lateral face.

What is the basic concept of investment? ›

Investment definition is an asset acquired or invested in to build wealth and save money from the hard earned income or appreciation. Investment meaning is primarily to obtain an additional source of income or gain profit from the investment over a specific period of time.

What is the concept of investment strategy? ›

An investment strategy is a plan designed to help individual investors achieve their financial and investment goals. Your investment strategy depends on your personal circ*mstances, including your age, capital, risk tolerance, and goals.

What is pyramid concept in stock market? ›

Pyramiding refers to adding more shares with a strong potential for an increased share price. In contrast, it refers to recruiting more and more investors in the chain, forming a pyramid of clients. It is also called pyramiding trading or averaging/pyramiding up. The reverse of it is called averaging down.

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