What is diversification in investment strategies?

Diversification in investment strategies refers to the practice of spreading investments across various assets to reduce risk. By allocating investments among different financial instruments, industries, and other categories, investors can mitigate the impact of poor performance in any single asset or sector. This strategy is grounded in the idea that different asset classes behave differently under varying market conditions, and by diversifying, an investor can potentially improve their overall risk-adjusted returns.

For instance, if one sector is underperforming, it may not affect the entire portfolio significantly because other investments might be performing well. This helps to manage the potential for losses as the positive performance of some investments can offset the negative returns of others. Therefore, diversifying creates a more stable portfolio over time and aims to enhance long-term financial performance while keeping risk in check.