What is diversification in investing?

Diversification in investing refers to the strategy of spreading investments across various asset classes, sectors, or geographical locations to minimize the overall risk of an investment portfolio. By holding a mix of assets, such as stocks, bonds, real estate, and others, an investor can reduce the impact of a poor-performing asset on their overall portfolio. If one investment goes down in value, the others may remain stable or even increase, helping to preserve capital and enhance the potential for returns.

This approach stems from the principle that not all investments will perform well at the same time; thus, a diversified portfolio can better weather economic fluctuations and volatility. By choosing to invest in different areas, one can capitalize on growth in diverse sectors while protecting against downturns in others. Consequently, diversification is a widely recommended strategy for both novice and experienced investors aiming to achieve more stable long-term results.