- Avoid putting all of your eggs in the same basket.
- Investing in stocks, bonds and currencies isn't really diversification.
- Investment diversity allows you to leverage a plethora of risk management strategies.
Nowadays, small businesses operate in a highly competitive environment that’s oversaturated with other businesses both big and small. Surviving such a landscape can be more difficult than business owners tend to believe.
Things may be going well for you but there’s a good chance you’ll hit a rough patch sooner or later. In that case, it’s very important to have the means to survive until your business is back on track. That’s why a lot of small businesses make investments with excess capital they accumulate over the years.
Making investments is a good way to minimize and mitigate the risks of your business going bankrupt when that rough patch does occur. However, simply making an investment isn’t enough to ensure your company’s financial security.
You have to be smart and rely on diversification so that your company is covered regardless of the situation. With that in mind, here’s how diversification can help small business owners manage risk more efficiently.
What is diversification?
Investment diversification is a strategy where you make multiple but fundamentally different investments. The key is to have little to no correlation whatsoever between your investments. That way, you’re mitigating the risk of your investment going bad and losing everything in the process.
In other words, you’re avoiding putting all of your eggs in the same basket. As an example, imagine you invest all of the money you have in stocks. The stock market crashes and you’re left with nothing.
However, if you diversify your investments and invest in stocks, gold and real estate, for instance, you’d still have your gold and real estate investments even if the stock market does crash.
As you may already know by now, every investment is risky to a certain degree. If you diversify your investments, you’re minimizing and mitigating the risk at the same time and ensuring you’ll eventually end up capitalizing on your investments.
By diversifying your investments, you’re basically opening new doors to potentially profitable opportunities. The goal of diversification is to maximize gains and minimize risks by allocating investments across different industries, financial instruments and other categories.
For example, a lot of small businesses today leverage the best Bitcoin mining hardware to mine Bitcoins. Bitcoin is the very first cryptocurrency and a digital asset that has no correlation with fiat money or assets.
In other words, the crypto market has its own set of rules and guidelines completely separated from the real world. In other words, whatever happens to the global economy has no impact whatsoever on the crypto market.
This is a good opportunity to invest in an asset that won’t be affected by anything that happens in the real world. You can still leverage cryptos to procure physical assets or exchange them for fiat money at any given time.
Risk management strategies
Investment diversity allows you to leverage a plethora of risk management strategies. You can basically further reduce the risks for each of your investments. For example, if you invest in stocks, you can use the so-called option strategies to minimize investment risks.
Options, such as calls and puts, allow you to sell or buy stocks at a previously agreed-upon price and date. Therefore, you’re no longer bothered by the fact that the price of a stock may significantly decrease in the meantime.
The negative side is that the price may rise in the meantime but investors agree on the price that suits them, so you’ll end up with a profit regardless. Such strategies exist for any type of investment. They allow you to further minimize risk even beyond the capabilities of diversifying your investment portfolio.
Risk management through asset allocation
Asset allocation is the essence of investment diversification. As mentioned before, by making multiple but different investments, you’re basically protecting your assets and ensuring you don’t lose everything at once.
For example, investing in stocks, bonds and currencies isn’t really diversification. All the aforementioned examples are high-risk investments that are influenced by the global economy and the geopolitical situation.
However, if you invest in stocks, real estate, gold and digital assets, you’re diversifying your investment portfolio. Such investments aren’t directly correlated and won’t be affected by the same conditions.
Therefore, asset allocation serves the purpose of helping you choose the investments that have little or no correlation at all so that you can be safe if one investment goes bad. Gold, for instance, has always been used as a hedge against inflation.
Making investments is a good way for business owners to ensure financial stability. Still, you can’t make just any investment and consider yourself safe. Instead, you have to be smart about it and leverage the full potential of investment diversification. That way, you can rest assured that your assets are safe and that you’ll be able to capitalize on your investment choices.