How is diversification defined in investment strategy?

Diversification in investment strategy is defined as spreading investments across various instruments, asset classes, or markets with the objective of reducing risk. The core principle behind diversification is that by investing in a range of different assets, the overall portfolio risk is minimized. This happens because different assets often respond differently to the same economic event; when some investments are performing poorly, others may be performing well, thus balancing the overall performance of the investment portfolio.

For instance, a portfolio that includes stocks, bonds, real estate, and possibly commodities can provide a more stable return than a portfolio concentrated in one area. This strategy is designed to mitigate the impact of poor performance in a single investment or asset class, ultimately leading to a more resilient financial position over time.