Diversification

Diversification is a risk management strategy that involves spreading investments across a variety of assets, sectors, or geographic regions to reduce exposure to any single asset or market. The idea is that by holding a diversified portfolio, losses in one area can be offset by gains in another, lowering the overall risk. Diversification can include investing in different asset classes, such as stocks, bonds, real estate, and commodities, as well as investing in different industries or global markets. While diversification can’t eliminate risk entirely, it is one of the most effective ways to manage it.

Example

An investor diversifies their portfolio by holding stocks in technology, healthcare, and energy companies, along with government bonds and real estate investments.