What does it mean if an investment is "diversified"?

When an investment is described as "diversified," it means that the investment portfolio is spread across various asset classes, sectors, or geographical regions. This strategy is designed to reduce risk by not putting all capital into a single investment or type of investment. By doing so, if one sector performs poorly, the other sectors or asset classes may perform well, potentially offsetting losses and contributing to more stable overall returns.

Diversification can include a mix of stocks, bonds, real estate, international investments, and other asset types. This approach helps investors manage risk, as different investments often respond differently to market conditions. Consequently, a diversified portfolio may present a more balanced risk-return profile, making it a fundamental principle in investment strategy. This concept highlights the significance of not depending solely on the performance of one investment, which is paramount in prudent investing.