What is the primary goal of diversification in investment strategies?

The primary goal of diversification in investment strategies is to reduce portfolio risk by spreading investments across various asset classes, sectors, or geographical regions. When an investor diversifies, they are essentially decreasing the likelihood that the poor performance of any single investment or asset class will have a disproportionate impact on the overall portfolio. This is because different investments often react differently to market conditions. For instance, when one asset class is struggling, another may perform well, helping balance the overall risk.

Diversification helps smooth out volatility and can provide more stable returns over time. While it is important to seek growth in investments, the practice of diversification primarily focuses on risk management rather than seeking to maximize potential returns or concentrating investments into top-performing assets. It is also crucial to note that while diversification can significantly reduce risk, it cannot eliminate all forms of risk in a portfolio, as there are market-wide risks that can impact all investments simultaneously.