What is a diversified portfolio designed to achieve?

A diversified portfolio is designed to reduce exposure to risk by mixing asset classes. This approach is grounded in the principle that different asset classes—such as stocks, bonds, real estate, and cash—often react differently to various market conditions. By spreading investments across various asset classes, an investor can mitigate the impact of poor performance from any single investment or sector.

For instance, when stock markets are down, bonds may perform better, providing a buffer against losses. This balance helps to stabilize overall portfolio performance, making risk more manageable while not necessarily sacrificing return potential. By diversifying, an investor aims to achieve a more consistent performance over time, aligning their risk tolerance with their investment goals.