What is diversification, and why is it important?

Diversification is the practice of spreading investments across various assets with the goal of reducing risk. By investing in a wide array of assets, financial advisors and investors can mitigate the potential negative impact that a poor performance in one investment might have on the overall portfolio. When one asset class suffers a decline, others may perform well, resulting in a more stable performance for the overall portfolio.

This strategy is particularly important because financial markets can be unpredictable, and different asset classes often respond differently to market conditions. As such, diversification can help protect an investor's capital and smooth out returns over time, making it a fundamental principle of sound investing. It reinforces the idea that not putting all your eggs in one basket can lead to financial security and stability.

In this context, focusing solely on a single asset class or trying to achieve maximum returns without regard for risk would expose investors to higher volatility and potential losses. Additionally, strategies that intentionally increase market volatility would not align with the aim of safeguarding investments through diversification.