In the context of trading, what does "diversification" refer to?

Diversification refers to the strategy of spreading investments across various asset classes to reduce risk. By distributing investments among a mix of assets—such as stocks, bonds, real estate, and commodities—an investor can minimize the potential negative impact of a poor performance by any single investment. This approach helps to stabilize overall returns as the performance of different asset classes tends to vary; when one asset class is underperforming, another may be doing well. The goal of diversification is to create a more balanced portfolio that can weather market volatility and uncertainties.

Focusing exclusively on a single asset, concentrating on high-risk investments, or only dedicating funds to philanthropic projects would not provide the same risk mitigation benefits as diversification. Each of those approaches exposes the investor to higher levels of risk without the protective benefits that come from a well-diversified portfolio.