What does diversification in investing mean?

Diversification in investing refers to the strategy of spreading investments across various types of assets, such as stocks, bonds, real estate, and other securities. The primary purpose of diversification is to reduce risk. By holding a variety of investments, the impact of any single asset's poor performance on the overall portfolio is minimized. In other words, when some investments underperform, others may perform well, which can stabilize overall returns and mitigate potential losses.

This strategy acknowledges that different assets react differently to market conditions. For instance, during economic downturns, certain sectors may suffer while others thrive. Thus, a diversified portfolio can provide more consistent returns over time and reduce volatility, making it a fundamental principle in investment management.