What is the concept of diversification in investment?

Diversification in investment is centered around the strategy of spreading investments across a variety of different assets, such as stocks, bonds, real estate, and more. This approach aims to minimize risk by ensuring that a portfolio is not overly dependent on the performance of a single asset or asset class. When one investment performs poorly, others may perform well, which helps to buffer against significant losses. This method recognizes that the markets can be unpredictable, and while certain sectors may experience downturns, others could thrive, providing a more stable overall return.

The benefits of diversification are rooted in the principle that various asset classes react differently to the same economic conditions. By holding a mix of assets, investors can enhance their chances of achieving a more favorable risk-return profile over the long term. This strategy is a fundamental aspect of modern portfolio theory and is widely encouraged for both individual and institutional investors seeking to build resilient financial portfolios.