Why is diversification important in investing?

Diversification is a critical strategy in investing because it aims to reduce the overall risk of an investment portfolio. By spreading investments across a variety of asset classes or securities, an investor can minimize the impact of any single asset's poor performance on the overall portfolio.

When one asset or sector underperforms, others may perform better, which can help stabilize returns. This not only lowers the potential for significant losses but also allows investors to capture gains from different market conditions.

Furthermore, diversification helps investors avoid being overly reliant on a single investment or asset type, which can be particularly important during periods of market volatility or economic downturns. As a result, an effectively diversified portfolio is less likely to experience dramatic fluctuations in value, making it a fundamental principle in risk management for investors.