Diversification is a risk management strategy that involves spreading investments across multiple asset classes, industries, geographic regions, and financial instruments to reduce exposure to any single position or market event. By holding assets that are not perfectly correlated, losses in one investment can be offset by gains in another, reducing overall portfolio volatility. Proper diversification is a cornerstone of modern portfolio theory and is essential for long-term wealth preservation.
Example
“Rather than putting all her money into tech stocks, she diversified her portfolio across equities, bonds, real estate, and cryptocurrency to reduce risk.”