What is diversification, and how does it reduce risk?

What is diversification, and how does it reduce risk?

Diversification is an investment strategy that involves spreading investments across different asset classes, industries, or stocks to reduce risk.

Instead of putting all money into one stock, investors allocate funds across multiple investments to minimize potential losses.

It reduces risk because different assets don’t move in the same direction at the same time.

For example, if one sector underperforms, gains in another can balance the losses.

This helps investors achieve more stable returns while protecting their portfolios from market volatility.

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