What does the term "diversification" refer to in investing?

The term "diversification" in investing refers to spreading investments across different asset classes, such as stocks, bonds, real estate, and other investment vehicles. This strategy aims to reduce the overall risk of an investment portfolio. By allocating funds to a variety of assets, an investor can minimize the potential impact of poor performance in any single investment. When one asset class underperforms, others may perform well, which can help ensure greater stability and reduce volatility in the portfolio.

Diversification does not imply concentrating investments in a single asset type, which can expose an investor to higher levels of risk. Nor does it focus on minimizing fees or achieving high yields without consideration of other risk factors. The key benefit of diversification lies in its ability to provide a more balanced approach to investing and to protect against unexpected market fluctuations.