What does "diversification" in investment strategy involve?

Diversification in investment strategy involves spreading investments across various assets to reduce risk. By not putting all of one's capital into a single investment, an investor can mitigate the impact of poor performance in any one asset. This approach aims to balance risk and reward by including a mix of different asset types—such as stocks, bonds, real estate, and commodities—in a portfolio, which can help cushion against market volatility and fluctuations.

The rationale behind diversification is grounded in the principle that different assets often react differently to the same economic or market event. Therefore, if one investment underperforms, others may perform well, thus stabilizing overall returns. This strategy is a fundamental concept in modern portfolio theory and is widely utilized by both individual and institutional investors to achieve more consistent performance over time.