Where Common Investments Typically Fall on the Risk Spectrum
In general, the ideas of risk and reward are closely connected. A simple way to understand this relationship is to visualize a risk pyramid: the bottom has lower-risk, lower-return options, while moderate- to more-aggressive choices are in the middle, and higher-risk options are at the top.
To clarify, this doesn't mean that one asset/investment is better than the other; investing depends on your goals and risk tolerance. However, visuals help show where different assets or investments fall along their risk spectrum.
Lower-Risk Foundation: These might be used for short-term goals, emergency savings, or the “steady” portion of a portfolio.
Cash & cash equivalents: Money you can access quickly with little to no price swings.
Money market accounts/funds: Cash-like savings that usually pay a bit more interest than a regular savings account.
Treasury bills (T-bills): Short-term loans you make to the U.S. government; generally considered very low risk.
Certificates of deposit (CDs): A bank product where you lock money up for a set time in exchange for a fixed interest rate.
Short-term Government & corporate bonds: Loans to the government or companies that usually pay regular interest; bond prices can still move, but typically less than stocks.
Moderate-Risk Middle: These might be used for long-term goals such as education savings or retirement, as they offer greater growth potential despite some fluctuations.
Income stocks: Stocks of companies that usually pay steady dividends (cash payouts), often more stable than high-growth companies.
Growth stocks: Stocks of companies focused on rapid growth. They offer higher potential gains but typically experience larger price fluctuations. These companies often do not pay dividends; instead, they reinvest profits to sustain ongoing growth.
Intermediate/Long-Term Bonds: Bonds that mature over several years; they usually offer higher interest than short-term bonds but can fluctuate more when interest rates change.
Mutual funds: A “basket” of investments managed within a single fund; it can include stocks, bonds, or both.
Index funds: A type of fund created to mirror a market index (like the S&P 500) rather than outperform it.
Real estate: Property or real estate funds can generate income and appreciate in value, but prices may still change.
See How Various Investments Have Performed Over Time
Higher-Risk Top: These can lead to significant profits, but they can also cause substantial losses, especially if you do not fully understand them.
Options: Contracts that give you the right, not the obligation, to buy or sell an investment at a specified price by a deadline.
Futures: Contracts that involve buying or selling an asset at a set price in the future; often used by professionals and can carry significant risk.
Commodities: Raw materials like oil, wheat, or natural gas; prices can change quickly because of global events.
Cryptocurrencies: Digital assets that can experience major price swings, resulting in high volatility.
Precious metals: Assets like gold and silver can be volatile and do not produce income, such as dividends or interest.
Penny stocks: Very inexpensive stocks that can be very volatile and may have a high risk of failure.
In Summary
Use this risk pyramid as a guide. The goal is to understand what you own, why you own it, and how much volatility you can realistically accept. When your investments match your timeline and comfort level, you're less likely to panic or chase trends.