What does diversification mean in investing?

Diversification in investing refers to the strategy of spreading investments across a variety of different assets or asset classes in order to minimize risk. This approach helps investors to avoid putting all their resources into a single investment, which could potentially lead to significant losses if that investment performs poorly. By diversifying, an investor can potentially smooth out the volatility of their portfolio since different investments may react differently to market conditions. For example, if one asset class underperforms, another might outperform, thus balancing the overall performance of the portfolio. This is a fundamental principle of risk management in investing, as it can protect against the unpredictability inherent in the markets.