What does the term "diversification" generally refer to in investing?

The term "diversification" in investing refers to the strategy of spreading investments across a variety of assets to reduce risk. By holding a diverse portfolio that includes different types of investments, such as stocks, bonds, mutual funds, and other assets, investors can decrease the impact of poor performance from any single investment. This is because various assets often react differently to market conditions; when one asset class is underperforming, another might be doing well, which can help stabilize overall returns.

This principle is fundamental in investment strategy because it helps balance risk and reward. A diversified portfolio is better positioned to withstand market volatility and economic downturns, making it a prudent strategy for long-term investing.