What does "diversification" refer to in the context of investment strategies?

Diversification in the context of investment strategies refers to the practice of spreading investments across various categories, which may include different asset classes, sectors, geographies, or types of securities. This strategy aims to mitigate risk by ensuring that the performance of a single investment does not significantly impact the overall portfolio. By having a diverse array of investments, an investor can protect against volatility and potential losses in any one area. For instance, if one investment category underperforms, others may perform well, balancing potential losses and enhancing overall portfolio stability. This approach enhances the likelihood of achieving more consistent returns over time.