What does diversification help mitigate?

Diversification helps mitigate investment risk by spreading investments across a variety of assets. When an investor diversifies their portfolio, they reduce the exposure to any single asset or risk. This approach minimizes the impact that a poor-performing investment can have on the overall portfolio. For instance, if one asset class, such as stocks, performs poorly, other asset classes, like bonds or real estate, may perform well, thereby balancing the overall returns.

Investment risk encompasses various risks associated with the fluctuation in the value of investments, including market risk, credit risk, and liquidity risk. By diversifying, an investor is less likely to experience significant losses, as the performance of different investments often does not move in correlation. This strategy is fundamental to achieving a more stable and predictable return on investment over time, making it a key principle in portfolio management.