What does a diversification strategy aim to achieve?

A diversification strategy aims to mitigate risk by spreading investments across various assets. This approach reduces the potential impact of a poor-performing asset on the overall portfolio. By holding a mix of asset types or industries, investors can protect themselves against volatility in any one area. For instance, if one investment declines in value, others may perform well, helping to cushion the overall financial impact on the portfolio. This strategy is grounded in the principle that not all assets or securities move in the same direction at the same time, thereby providing a buffer against market fluctuations and enhancing the potential for more stable returns over time. Each asset class may respond differently to economic conditions, and by diversifying, investors can take advantage of this to achieve a more balanced risk profile.