Capital accumulation is the process by which a company, individual, or economy reinvests its capital in order to generate additional capital. The concept can be applied to companies, retail investors, and even economies.
The term was used by Karl Marx as the reason behind socioeconomic disparities. His reasoning was that since capital was reinvested in order to accumulate more capital, only those at the top with access to capital would benefit from it. However, his economic theory was far from sound. We know that whenever capital is reinvested, everyone in the socioeconomic ladder benefits from it, and from the economic growth it generates.
Capital accumulation investing
As we have seen, the concept of capital accumulation can be applied in different cases. However, we are much more interested in understanding how this term relates to investing. Investment strategies will often fall upon three main categories:
- Capital preservation
- Capital accumulation
- Accumulation and preservation of capital
A capital accumulation strategy will often entail an investor accumulating assets in its investment portfolio. Their goal is therefore to accumulate as much capital as possible through a consistent reinvestment in other assets.
Capital accumulation and age
Depending on your investor profile you may choose one of these strategies to best suit your investment goals. Perhaps the most significant factor to determine what the best strategy to use is certainly age.
Age will be directly related to the amount of risk you want in your portfolio. An older investor will most likely opt for a capital preservation investment strategy, that will ensure that his lifestyle remains unchanged and that his capital is safe. Conversely, a young investor might look to accumulate capital. Therefore, employing a totally different investment strategy that starts by selecting different assets, and completely different portfolio allocations.
Why capital accumulation investments can help you build wealth?
When it comes to investing, risk and return are often correlated. Therefore, an investor whose goal is to grow his capital will have to take a considerably higher risk than someone that wants to preserve capital. Capital accumulation investments are certainly riskier, but they allow investors to build wealth over time. These investments are based on a risk-seeking investor profile. By which an investor is willing to expose his portfolio to a higher degree of risk in order to pursue larger returns.
It should be noted that in order to accumulate capital, investors need to be able to handle risk and volatility. Since this investment strategy is associated with a higher degree of risk, it should be expected that the volatility of the portfolio, and the risk exposure will be considerably higher.
Capital accumulation also tends to be related to concentrated portfolios. This means that not only the risk of each asset will be higher, but so will the overall portfolio.
What are the best capital accumulation investments?
A capital accumulation investment strategy will also directly affect which assets the investor will be allocating his capital to.
Capital accumulation investment strategies will often overlook bonds because their expected returns tend to be lower. Instead, capital accumulation investment strategies focus on stocks. Not just any kind of stock, we are looking at stocks that can double, triple, or even quadruple.
Growth stocks are perhaps the best solution for investors looking to implement capital appreciation investment strategies. Their high growth means that their expected returns tend to be higher. The downside is that the risks involved are usually higher. Another factor to consider is that valuation among growth stocks tends to be higher. Meaning that the expected growth is oftentimes priced in.
Over the last few years, crypto has become the number one asset class for young investors looking to accumulate capital. Some cryptocurrencies have seen spectacular price increases. Despite that some also suffered rug pulls, leaving investors holding worthless tokens. Most cryptocurrencies are highly speculative, and volatile therefore they might not be the best asset to invest in. Especially if you are looking for steady and consistent capital accumulation.
Commodities are also another asset class used often by investors looking to accumulate capital. In theory, they are easier to analyze and research, than crypto and stocks. Commodities tend to be dependent on two factors: supply and demand. Therefore if you can find a commodity that has a supply shortage, or a spike in demand you should go long. Conversely, a commodity with increased supply or decreased demand could provide you with an opportunity to go short. Commodities can be traded using different products, and perhaps using derivatives could be an option.
Derivatives also tend to be used by investors and traders with a capital accumulation mindset. This is because the expected returns trading these instruments tends to be much higher when compared with stocks and commodities for example. It allows you to also use leverage, and it can generate hefty returns. The most common derivatives used for capital accumulation that are accessible to retail investors are:
Leverage and capital accumulation
It is crucial that we discuss the use of leverage when implementing a capital accumulation investment strategy. Leverage is certainly a double-edged sword, and it is most of the time best to stay away from it. It can either boost your profits or accentuate your losses. Therefore, it should be used carefully and wisely.
Investors and traders alike tend to be easily attracted by the possible returns they might be able to generate using leverage. However, they are often more focused on the upside than the potential downside. This is among the most common investing mistakes. Whether you are trading or investing, your main concern should always be the potential downside risks.
Speculation and capital accumulation
Investors and traders will often engage in speculative trades and investments in order to accumulate capital. This is certainly an additional risk, but it is also a strategy that should be mentioned. They might do it through unconventional financial products, such as derivatives. Some might even be inclined to use binary options and CFDs, which is even riskier. Although these types of speculative bets might work out for some, most of those involved lose money in products like binary options and CFDs.
Investors should know that in order to accumulate capital they do not have to expose themselves to extreme risks. Instead focusing on time-proven strategies that can easily be implemented seems to be a far more efficient strategy.
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