What does diversification in investment strategy involve?

Diversification in investment strategy involves holding a variety of different assets to reduce risk. This approach recognizes that different assets will respond differently to the same market conditions. By spreading investments across various asset classes—such as stocks, bonds, real estate, and commodities—an investor can mitigate the impact of poor performance in any single investment. The rationale behind diversification is that the likelihood of all the assets in a portfolio performing poorly simultaneously is reduced, thereby enhancing the potential for more stable returns over time. This strategy helps to balance out losses in some areas with gains in others, ultimately leading to a more resilient and potentially lucrative investment portfolio.