What does the concept of diversification aim to achieve?

The concept of diversification primarily aims to spread investments across various assets or sectors to reduce risk. By diversifying, an investor or a company can avoid over-exposure to any single investment, which might be negatively affected by market fluctuations or specific downturns in that industry. This strategy helps to mitigate the potential negative impact of poor performance in one area by compensating with stronger performance in others.

For example, if an investor only holds stocks in a single industry and that industry faces a downturn, their investment could suffer significantly. However, if the same investor diversifies their portfolio by including stocks from different industries, bonds, and other asset classes, the overall impact of a downturn in any one sector is lessened, leading to a more stable investment outcome over time.