Whether you’re a business owner or large-scale investor, diversification is one of the greatest weapons in your armoury when looking to optimise growth and profitability (especially during challenging times).
This is particularly relevant in the current climate, with double-digit inflation impinging on consumer spending and a base interest rate of 3% having hiked the cost of commercial borrowing considerably.
In this post, we’ll talk more about diversification, while asking how you can do this successfully in 2023.
What are the Benefits of Diversification?
It makes little sense to tie your capital up in a low-yield savings account or inventory in the current climate, particularly as diversifying into new and lucrative markets can unlock additional revenue streams while simultaneously minimising your exposure to risk.
In pure investment terms, creating a more diverse portfolio ensures that your capital is less likely to be damaged by setbacks or unexpected volatility in any single security, asset class or marketplace.
At the same time, this type of portfolio features strategically selected assets that counteract each other risk profiles and vulnerabilities, optimising your potential returns over time.
If you look at the current economic climate, for example, you can see that currency and gross domestic product (GDP) values are in decline. You can read the answer to the question ‘what is GDP?’ here, but these factors combine to create a volatile climate that increases the risk facing investors.
So, by focusing on diversification and minimising your real-time exposure to market risks, you can prevent losses while maximising your potential returns over time.
Appraising Index or Bond Funds
When starting out, bond funds are among the most popular diversification options. This is a relatively low-risk asset class that can deliver incremental gains in a challenging economy, while it provides a fixed-income solution that hedges directly against market volatility.
Indexes are also highly popular diversification options, with these best represented by iconic names like the S&P 500 and FTSE 100 in the UK.
Indexes are popular because they track value and performance across a broad range of assets or securities, from tech stocks (through the Nasdaq 100) to selected equities from specific countries (like the Footsie).
What About Spread Betting?
From a diversification perspective, spread betting is another popular and flexible investment option.
Spread betting refers to a type of wager on how you think a market or asset’s price will perform, enabling you to speculate on and leverage price movements without assuming ownership of the underlying asset.
Because of this, you can use spread betting to profit even when an asset’s price falls, while actively leveraging market volatility in high-risk markets such as forex to make downturns work for you.
The Last Word
Ultimately, the goal should be to tailor your portfolio in line with your risk profile, capital holdings and the wider economic climate.
The latter is especially crucial, as it can inform your decisions in terms of minimising exposure to certain markets, assets and geographical regions.
For example, diversifying into new and high growth sectors that have relatively low correlation to the performance of your firm may prove beneficial at present.