What is portfolio diversification?

Portfolio diversification is a financial strategy that involves spreading investments across various assets to reduce risk. By allocating funds among a mix of asset classes, such as stocks, bonds, real estate, and other securities, investors can minimize the impact of a poor-performing asset on the overall portfolio. This approach helps balance the potential for returns against the inherent risks associated with market volatility. The idea behind diversification is that different asset classes often react differently to market conditions; when one asset class is underperforming, others may be performing well, thus stabilizing the portfolio's overall performance. This concept is foundational to risk management in investing, making it a critical component of financial planning and investment strategy.

Other options outline different concepts that do not align with the principle of spreading investments to reduce risk. Focusing on a single asset's returns, analyzing market trends, or employing short-selling techniques reflects more specialized strategies rather than the broad approach of diversification.