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 investment pyramid? ›

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.

What is the concept of 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.

What does pyramid mean in finance? ›

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. The scheme is called a "pyramid" because at each level, the number of investors increases.

What are the 5 levels 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.

What are the 4 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.

Is Pyramiding a good strategy? ›

The Bottom Line. It is important to remember that the pyramiding strategy works well in trending markets and will result in greater profits without increasing original risk. In order to prevent increased risk, stops must be continually moved up to recent support levels.

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 50 30 20 rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

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.

What is the best pyramid strategy? ›

The key to successful pyramiding is to always maintain a proper risk to reward ratio, which says that your risk can never be greater than half the potential reward. So if your profit target is 200 pips, your stop loss must be no greater than 100 pips. This achieves a 1:2 risk to reward ratio, also known as “2R”.

What is the most famous pyramid scheme? ›

Bernie Madoff: The most famous Ponzi scheme in recent history—and the single largest fraud of investors in the United States—was orchestrated for more than a decade by Bernard Madoff, who defrauded investors in Bernard L.

What is the pyramid strategy? ›

By putting the various elements of a good strategic plan into a pyramid form, it is easy to see the "big picture" and relationships between different elements of the plan in a form that is easy to understand: the purpose shown at the apex cascades from one level of strategy to the next.

What are the 4 golden rules investing? ›

In conclusion, the 4 golden rules of investment - start early, watch out for costs, stick to your goals, and diversify - collectively play a crucial role in building a resilient and rewarding investment portfolio. By starting early, investors can benefit from compounding returns over time.

What is the 10 5 3 rule of investment? ›

According to this rule, stocks can potentially return 10% annually, bonds 5%, and cash 3%. While these figures are not guarantees, they serve as a guideline for investors to forecast potential returns and adjust their portfolio accordingly.

What are the 5 golden rules of investing? ›

The golden rules of investing
  • If you can't afford to invest yet, don't. It's true that starting to invest early can give your investments more time to grow over the long term. ...
  • Set your investment expectations. ...
  • Understand your investment. ...
  • Diversify. ...
  • Take a long-term view. ...
  • Keep on top of your investments.

What are level 1, 2, 3 investments? ›

Level 1 assets are those that are liquid and easy to value based on publicly quoted market prices. Level 2 assets are harder to value and can only partially be taken from quoted market prices but they can be reasonably extrapolated based on quoted market prices. Level 3 assets are difficult to value.

What is a good example of a pyramid scheme? ›

A classic example of a pyramid scheme is a chain letter. Recipients are encouraged to add new people to the chain and to also send money or gifts to those at the top of the chain. These are illegal practices and like all other pyramid schemes, 90% of participants will lose money.

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