What is diversification in investing?

Diversification in investing is a strategy that involves spreading investments across different asset classes, industries, or geographic regions to reduce overall risk. Instead of putting all money into one investment, such as a single stock, diversification balances a portfolio by including stocks, bonds, real estate, commodities, or mutual funds. This helps protect against losses because if one investment performs poorly, others may perform well, stabilizing returns. Diversification does not eliminate risk entirely but reduces the impact of volatility on a portfolio. It is often considered a fundamental principle of smart investing, helping investors achieve steady growth while minimizing the chances of significant financial loss during economic downturns or market fluctuations.