What does diversification in investment mean?

Diversification in investment refers to the strategy of spreading investments across various sectors, asset classes, and geographic regions to reduce risk. By allocating funds into a mix of different investments, individuals can mitigate the impact of a poor-performing asset or sector on their overall portfolio. The underlying principle is that not all investments will perform poorly at the same time; thus, when some investments are down, others may be doing well, which can help stabilize returns and reduce volatility.

This approach to investing helps balance the risks associated with market fluctuations and individual asset performance, ultimately leading to a more resilient financial strategy. It encourages allocating resources in a way that captures growth from multiple sources while avoiding the pitfalls of putting all eggs in one basket, which can expose investors to significant losses if that single investment underperforms.