Regardless of the nature of your business or the industry that it operates in, capital growth is central to long-term success. Whether you need to create working capital or avoid collateral losses, attempting to optimise profits should always be your first port of call.
Fortunately, there are several ways in which you can increase your capital and boost bottom line profits, some of which are linked directly to your commercial operations and others that involve the global investment market.
In this post, we’ll look at the benefits of diversification strategy within your business, and the best strategies for increasing and growing capital over time.
The Importance of Diversification Strategy
The idea of investing business capital in the financial markets may seem a little risky, particularly given the volatility of assets such as currency and commodities.
However, stocks and bonds offer far more stable and reliable asset classes, while the utilisation of a diversification strategy can also help to mitigate risk.
But why is this the case? Well, in simple terms, the process of diversification (which involves spreading your capital across a relatively broad range of assets, instruments and markets) actively reduces risk over an extended period of time.
This refers to unsystematic risk, which is generally avoidable and includes instances where a disproportionate amount of capital is held in one or a small selection of similar asset classes.
A balanced diversification strategy achieves this by minimising your exposure to a single market or asset class, while potentially delivering sustained and incremental returns from a wider selection of sources. Sure, a diversified portfolio may deliver slightly lower rewards over time, but this is a result of mitigating risk and capping potential losses over time.
Of course, there are also risks associated with over-diversification, as this can undermine profits on a significant scale and create more substantial transaction costs.
This will eat into your diminished profits further, creating a portfolio and selection of assets that are completely imbalanced from the perspective of risk and reward.
What are the Top Strategies for Growing Your Capital?
As we’ve already touched on, the combination of stocks and bonds provide a solid investment strategy for growing commercial capital, especially over an extended period of time.
So-called “dividend” stocks are particularly effective, as they represent shares in blue-chip companies that have seen their equity value appreciate consistently over a period of years. As a result, they pay out regular and incrementally larger dividends, with stocks such as Coca-Cola typically included in this grouping.
However, you can also diversify your portfolio by targeting slightly riskier assets, which may produce a higher yield. Take the forex market, for example, where you can trade international currency pairs as derivatives and profit through price speculation rather than assuming ownership of the underlying asset.
Another interesting asset class to consider is cryptocurrency, despite the market’s recent bear run and the crash of market-leading tokens such as Bitcoin (BTC).
The reason for this is simple; as despite their inherent volatility, assets like BTC have seen their overall value increase four-fold in the last 12 months. BTC and other tokens such as Ethereum have also emerged as more secure stores of wealth during 2020, with this compounded by their finite supply.
So, while we’d recommend that you tread carefully when diversifying into crypto, this can add an interesting dimension to your business (especially if you intend to accept crypto assets as payment in the future).