What does diversification aim to achieve in investing?

Diversification aims to spread investments across various assets to reduce risk. This strategy is based on the principle that by allocating investments among different financial instruments, industries, and other categories, an investor can mitigate potential losses. When one investment performs poorly, others may perform well, balancing the overall performance of the portfolio.

The core idea behind diversification is to avoid the pitfalls of putting all your eggs in one basket. By not concentrating investments in a single asset or sector, an investor reduces the impact of volatility and adverse events that may affect specific investments.

In addition, a diversified portfolio can enhance the potential for returns by having exposure to various market conditions. Diversification is not about maximizing returns through high-risk assets nor focusing solely on one sector or asset category, as those approaches may lead to increased risk rather than reducing it. Hence, the strategy of spreading investments reflects a more prudent investment approach that acknowledges the inherent uncertainties in the market.