What is the concept of diversification in investing, and why is it important to manage risk within an investment portfolio?

Diversification in investing is the strategy of spreading investments across different asset classes, such as stocks, bonds, and real estate, to reduce risk. The idea is that different investments will react differently to the same economic event, so if one asset performs poorly, others may perform better, balancing out potential losses. It’s important to manage risk through diversification because it helps protect the portfolio from market volatility. By not putting all funds into a single investment, an investor lowers the chance of significant loss, making the portfolio more stable over time and improving the potential for consistent returns.