What is a diversified portfolio?

A diversified portfolio refers to a collection of various investments designed specifically to reduce risk. The core principle behind diversification is that by spreading investments across different asset classes, sectors, or markets, the overall risk of the portfolio is mitigated. This means that if one investment performs poorly, others within the portfolio may perform well, helping to offset the losses.

Investing in a variety of financial instruments, such as stocks, bonds, mutual funds, real estate, and even alternative assets, allows investors to guard against significant losses. This strategy leverages different behavior patterns of assets: some might thrive while others decline. Hence, the goal of a diversified portfolio is to balance out performance over time, which is essential for long-term financial health and stability.

In contrast, the other options do not capture the essence of what constitutes a diversified portfolio. A collection of all recent investments does not imply any strategy for risk management. Minimizing tax liabilities is unrelated to the concept of diversification itself, even though tax strategies can be part of an overall investment plan. Tracking market trends may inform investment decisions but does not define the structure or intent of a diversified portfolio.