What does diversification aim to achieve in investment?

Diversification in investment is a strategy designed to reduce risk by spreading investments across a variety of assets. The fundamental principle behind diversification is that different assets respond differently to changes in the market. By holding a mix of asset types or investments, an investor can potentially mitigate the impact of poor performance in any single investment.

For example, if one sector of the market is performing poorly, other sectors or asset classes may perform well, which can help stabilize an investor’s overall portfolio. This approach aims to smooth out returns over time and minimize the risk of significant losses, as it lowers the exposure to any one investment or sector's volatility.

This contrasts with the idea of concentrating investments in one asset or maximizing risk exposure, which could lead to larger losses if that single investment underperforms. The goal of diversification is to create a more balanced and resilient portfolio that can endure various market conditions while still aiming for reasonable returns.