PostHeaderIcon Understanding The Investment Pyramid

Monitoring Investments

Different investors utilize different methods and investing techniques to ensure success. Some investors use the investment pyramid in order to make sure they not only earn profits from their investments, but also to make sure they are as secure and safe as possible. The investment pyramid is actually a strategy of managing one’s portfolio by allocating assets according to their relative safety and soundness of the said investments.

Pyramid Composition

An investment pyramid is built according to how safe and stable the assets in the portfolio are placed on top of each other. They provide a guideline for investors as to how much of each assets are allocated.

The pyramid base, which is the widest portion, usually contains the safest and lowest risk investments. The middle part is usually composed of growth investments while the topmost and the smallest tier reserved for speculative investments.

In a typical investment pyramid, the base usually is allocated for government bonds and money market securities. The middle portion of the pyramid is provided for stock investments while the top is allocated for options and futures investments. In this set-up, the higher the one goes up the investment pyramid, the greater the risk and the potential returns become.

Pyramiding Investments

The basic concept behind pyramiding is that investors try to take advantage of investments that are performing well and allows larger profits as the position grows. The best part is that the investment risk need not be increased if it is being performed properly. The investment pyramid is usually used for trading long positions. But this strategy can also be used and applied for short selling.

In pyramiding, the trader usually only adds to positions that are turning profits for them and show continued strength. By this virtue, traders continue adding positions even if the stocks break new highs or even dip to their previous lows. What the investor does is to take advantage of the trends by adding into the position based on the wave being shown by the stock’s trend.

Possible Problems

Along with other investment strategies, an investment pyramid is not entirely foolproof. It works on markets that are influenced by trends. Problems might be experienced in markets that experience wide price gaps from one day to the next.


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