What does diversification in investments aim to achieve?

Diversification in investments primarily aims to spread investments across various assets to reduce risk. By allocating capital into a mix of different asset classes, sectors, or geographic regions, an investor can mitigate the impact of poor performance in any single investment. This principle is based on the idea that different assets often react differently to the same economic events; as a result, when one investment is underperforming, others may be doing better, leading to a more stable overall portfolio.

The fundamental concept behind diversification is to avoid putting all your eggs in one basket. For instance, if an investor only holds stocks of one particular company, they are highly susceptible to that company's performance and market fluctuations. However, if they hold a diversified portfolio that includes stocks, bonds, real estate, and other types of investments, the poor performance of one asset can potentially be offset by the positive performance of another.

This strategy does not guarantee against loss but helps to manage and lower the overall risk in an investment portfolio, aligning with the investments' risk-return profile that many investors seek to achieve.