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

Diversification is an investment strategy that involves spreading investments across different asset classes, industries, or geographic regions to reduce risk. The idea is that by holding a variety of investments, the negative performance of one asset or sector can be offset by the positive performance of others. This helps to protect an investor's portfolio from significant losses. Diversification is important for managing investment risk because it lowers the impact of market volatility, reduces the likelihood of a large loss, and enhances the potential for stable, long-term returns. It prevents a portfolio from being overly dependent on any single investment.