What is the main advantage of diversification in an investment portfolio?

The main advantage of diversification in an investment portfolio is that it lowers overall risk through exposure to different assets. By spreading investments across various asset classes, industries, and geographical locations, investors can protect themselves from the volatility of specific investments or market sectors. If one asset performs poorly, others may perform well, thereby mitigating potential losses.

This strategy is grounded in the principle that not all assets react to market changes in the same way. For example, bonds might perform well during economic downturns while stocks might suffer; by holding both, investors can balance their risk and return. Diversification doesn’t eliminate risk entirely but can significantly reduce it, making it a fundamental strategy for long-term investors aiming for stability in their portfolios.