Diversification is an investment strategy that involves spreading your investments across different asset classes, industries, and geographic regions to reduce risk. The idea is simple: don't put all your eggs in one basket.
By diversifying your portfolio, you minimize the impact of any single investment's poor performance on your overall returns. For example, if you invest only in technology stocks and the tech sector crashes, your entire portfolio suffers. But if you also hold bonds, real estate, and international stocks, the losses in tech may be offset by gains in other areas.
Diversification doesn't guarantee profits or prevent losses, but it significantly reduces the risk of catastrophic losses. A well-diversified portfolio typically includes a mix of stocks, bonds, real estate, and other assets tailored to the investor's risk tolerance and financial goals.