What is diversification in investment management intended to achieve?

Diversification in investment management is intended to spread investments across various assets to reduce risk. The fundamental principle behind diversification is that different asset classes often respond differently to market conditions. By investing in a range of assets—such as stocks, bonds, real estate, and commodities—an investor can mitigate the volatility of their portfolio.

When one asset or sector underperforms, others may perform well, thus buffering against significant losses and providing more stable returns over time. This strategy is based on the idea that a well-diversified portfolio can lead to a more favorable risk-to-reward profile compared to a concentrated investment approach. The goal is to ensure that the impact of poor performance in one investment is minimized by the stability or growth of others, enhancing the overall resilience of the investment strategy.