What does it mean to diversify your investments?

Diversifying your investments refers to the strategy of spreading your investments across different asset classes, such as stocks, bonds, real estate, and commodities, in order to reduce risk. By doing this, you minimize the impact that any single investment's poor performance can have on your overall portfolio. If one asset class performs poorly, the others may perform well, balancing out the potential losses. This approach helps to create a more stable and resilient portfolio, leading to potentially smoother returns over time.

In contrast, concentrating investments in one area could significantly increase risk. Investing only in low-risk securities may limit potential returns, as those securities typically do not offer high growth opportunities. Frequently buying and selling stocks for quick profits constitutes a trading strategy rather than a diversification strategy, and it often increases transaction costs and taxes while also carrying a higher risk due to market volatility. Therefore, spreading investments across various asset classes is a fundamental principle for managing investment risk effectively.