What is diversification, and why is it considered an important strategy for managing investment risk?

Diversification is an investment strategy that involves spreading investments across different asset classes, sectors, or geographical regions to reduce risk. By holding a variety of investments, an investor can minimize the impact of poor performance in any single investment. If one asset class or market segment declines, others may perform better, balancing the overall risk. This strategy helps protect against the volatility of individual assets, reducing the likelihood of significant losses. Diversification is essential because it helps investors achieve more stable returns over time, ensuring that their portfolios are less exposed to market fluctuations.