Portfolio diversification is an investment strategy that involves spreading investments across various financial assets, such as stocks, bonds, real estate, and other securities, to reduce overall risk. The primary goal of diversification is to minimize the impact of any single asset’s poor performance on the overall portfolio, thereby improving the potential for returns while mitigating the volatility associated with individual investments. By holding a mix of different asset types and sectors, investors can enhance the likelihood of achieving more stable returns over time. The principle behind diversification is based on the idea that different assets often respond differently to market conditions, so combining them can lead to a more balanced and resilient portfolio.
Investment performance is cyclical, with different asset classes shining at different times. The "Magnificent 7" stocks currently dominate the market, but they will not always outperform. Diversification, like investing in…