What does diversification in an investment portfolio aim to achieve?

Diversification in an investment portfolio aims to reduce the overall risk by spreading investments across different asset classes, sectors, or geographic regions. The underlying principle is that by not putting all your eggs in one basket, the negative performance of one investment can be offset by the positive performance of others. This strategy helps to mitigate the impact of market volatility on a portfolio, as different assets often respond differently to economic changes and market events.

For instance, if stocks are performing poorly due to a market downturn, bonds or real estate might be holding steady or even performing well, thereby cushioning the overall portfolio from significant losses. This approach is essential for managing risk and helping investors achieve more stable returns over time.