What does this Pyramid Tell Us?
Ans- Risk & Reward various Types of Investment offers??
Answer is more deep.
Are You New to Financial Markets one should use a Approach called Capital Allocation Knowledge Model ,
Term first Coined by Wealthcreatures Team.
What does Capital Allocation Knowledge Model mean?
The level of Knowledge of a new individual entering the Financial Markets is very Low .
At this time he thinks Stock market is Quick money making machine and then he Gambles and finally he looses his significant capital only to realize that markets are run by Big people and it is difficult to make money.
Like any business Financial Markets are a self run businesses which require KNOWLEDGE ,EXPERIENCE ,CAPITAL and RIGHT MINDSET.
Investment In Risky assets should be Proportional to Knowledge of an individual or in other words Investment in Risky Assets
At Early Stage Individual should Invest Large Amount of His capital to Fixed Income group i.e Lower Risk. A Typical allocation should be 50-60%.
With only 10-20% in hands he should experiment in high risk assets such as Bluechip stocks which has LIMITED RISK.10-20% in moderate risk and 10% in High Risk assets.
After a few months of experience he is sure to loose not at start but GRADUALLY. He should start to analyze the Dynamics of markets, Forces of markets and should learn from markets how various factors affect markets.
After Learning Above he would be equip Mentally to face markets risk and should start to study Fundamentals of company and track them and then increase the Capital exposure to Risky assets.
As the Level of Knowledge increases he should slowly start to shift the capital from Lower Risk to Higher Risk asset class.
It is well said that “DON’T TEST THE DEPTH OF SEA WITH BOTH LEGS ” or else you will go down or Don’t keep all Eggs in One Nest.
New investors should first focus on safe bets then gradually increase risk appetite and shift capital to high Risk bets as level of knowledge increases.
Beauty of this model is that it tells that High Risk assets should be tested with less capital, As one moves higher the pyramid Initially test with less capital and ones Knowledge along with experience is gained increase risk appetite gradually. This is same as structure of Pyramid.