What does the concept of "diversification" in investment primarily help achieve?

The concept of "diversification" in investment primarily helps achieve risk reduction by spreading investments across various assets. This strategy is based on the principle that different asset classes often react differently to market conditions. When an investor diversifies their portfolio by allocating funds into various assets — such as stocks, bonds, and real estate — the overall risk is mitigated. If one asset class underperforms, others may perform better, balancing potential losses and stabilizing the overall performance of the portfolio.

Diversification does not guarantee profits or prevent losses entirely, as no investment is free from risk. Instead, it serves as a strategy to reduce the impact of volatility on the portfolio, making it an essential practice for managing investment risk effectively.