After determining how much risk you can take according to your time horizon and your available bank roll, you can employ the risk pyramid method of allocating your money between various investments. The risk pyramid works by dividing the pyramid into three horizontal levels.
The bottom level of the pyramid is the foundation and the most solid part of the whole pyramid. Therefore, it should have low risk investments which have predictable returns. This should be where the bulk of your money is invested. It should help you to sleep well at night.
The middle level of the pyramid should be comprised of medium risk investments that provide a stable return while enabling your principle to grow. These investments are more risky than the investments in the bottom level but should still be relatively safe.
The top level of the pyramid is the tiniest section and should contain the most risky investments. The money invested here should be money that you can afford to lose without suffering severe consequences.
The nice thing about the pyramid model is that each person can adjust it to his own level of risk comfort. A person with lower risk tolerance will make the base bigger and the top smaller. A greater risk taker will make the top section bigger, investing in larger risk investments and will cut the money allocated to the bottom level of the pyramid.
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