Using the investment pyramid
- The chart below arranges various investment choices according to the risk-reward relationship.
- The higher the investment is located in the pyramid, the higher the potential return, and the higher the risk.
- Since cash and cash equivalents offer the lowest risk and return, you will find them at the bottom of the pyramid.
- Mutual funds are included in all categories because there are many different kinds of mutual funds. Each fund has its own level of return and risk.
- The classification of a stock as low, moderate or high risk depends on your point of view. What seems risky to you may not seem risky to the next person.
What should I ask before I buy any investment?
- Do I understand how this investment works?
- Do I have good information about how this investment has done in the past?
- Do I understand the costs of this investment and the risks?
- Am I looking for safety, income, or growth from this investment?
- Do I have good information about how this investment is likely to do in the future?
- How much can I hope or expect to make?
- What other investments do I have already? Do I want to invest in more of the same or do something new?
- How long do I plan to invest (my time horizon)?
The longer you have to reach a goal, the more aggressive you can be when you invest.
Curious how your time horizon will affect you investment choices? Learn more now...
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.
