What does it mean to "diversify" investments?

To "diversify" investments refers to the strategy of spreading investments across various assets rather than concentrating them in a single asset. This approach is employed to mitigate risk; by having a variety of investments, the negative performance of one asset can be offset by the positive performance of others. Diversification helps cushion the impact of market volatility because different sectors and asset classes often react differently to market changes, which can lead to more stable overall returns. This concept is fundamental in financial literacy, as it underscores the importance of balancing risk and potential reward through a well-structured portfolio. By diversifying, investors can enhance their chances of achieving consistent financial growth over time.