What is the main goal of diversification in an investment strategy?

The primary aim of diversification in an investment strategy is to reduce risk. When an investor diversifies their portfolio, they spread their investments across various asset classes, sectors, and geographic regions. This approach helps to minimize the impact of poor performance in any single investment or market segment on the overall portfolio. By not putting all their eggs in one basket, investors can protect themselves from significant losses that may occur if one investment underperforms.

Diversification works on the principle that different assets do not always move in the same direction under various market conditions. When some assets are declining, others may be rising, which can lead to a more stable and consistent performance of the portfolio over time. Thus, while it might not guarantee profits or protect against losses in a declining market, diversification effectively lowers the probability of significant declines in overall investment value, making it a key strategy for risk management in investing.