What does "diversification" mean in the context of asset management?

In the context of asset management, diversification refers to the practice of spreading investments across a variety of asset classes, such as stocks, bonds, real estate, and other securities. The primary goal of diversification is to reduce the overall risk of an investment portfolio. By allocating funds to different types of investments, an investor can mitigate the impact of poor performance in any single asset or asset class.

When one area of the market underperforms, other investments may still perform well, which helps cushion the overall portfolio against significant losses. This strategy acknowledges that market conditions can be unpredictable and that different assets respond differently to economic changes. Thus, a well-diversified portfolio is often more resilient to volatility and downturns.

In contrast, concentrating investments in a few high-performing assets may lead to greater risk exposure if those investments fail or decline in value. Investing solely in bonds or following a single investment strategy also limits the benefit of risk mitigation that diversification offers.