What is "diversification" in the context of investment?

Diversification in the context of investment refers to the strategy of spreading investments across various assets to reduce risk. This approach mitigates the impact of a poor performance in any single asset. By holding a diverse portfolio that includes different asset classes, sectors, and geographic locations, an investor can potentially enhance returns while minimizing volatility. This technique helps in ensuring that a downturn in one area of investment may be offset by gains in another, leading to a more stable overall portfolio performance.

The essence of diversification is rooted in the concept that "not putting all your eggs in one basket" aids in managing risk effectively, making it a foundational principle in modern portfolio theory.