What is diversification in investing?

Diversification in investing refers to the practice of spreading investments across a variety of different assets or asset classes. The primary purpose of diversification is to minimize risk. By not putting all your resources into a single investment, you can reduce the impact that a poor performance in any one asset may have on your overall portfolio. This strategy takes advantage of the fact that different assets often react differently to the same economic event; for example, when stocks might decline, bonds or real estate might perform better, thus balancing out potential losses.

By allocating funds among different types of investments, such as stocks, bonds, real estate, and other vehicles, an investor can achieve a more stable overall return. The underlying principle is that the performance of individual investments is often not correlated, which means losses in one area can be offset by gains in another, providing greater stability to your financial goals over time.