In the context of investment strategy, what does 'diversification' aim to achieve?

Diversification is a fundamental investment strategy that aims to reduce overall risk by spreading investments across a variety of assets. The logic behind diversification is based on the principle that different assets often respond differently to market events. By holding a mix of investments—such as stocks, bonds, and other securities—an investor can potentially minimize the negative impact that a poor performance in any single asset might have on the overall portfolio.

This strategy is particularly effective in mitigating the risks associated with market volatility and uncertainties, as it is unlikely that all investments will experience downturns at the same time. A well-diversified portfolio can provide stability and reduce the likelihood of significant losses, making it a critical component of sound investment practices.

Focusing solely on maximizing short-term profits, increasing assets within a single sector, or ensuring market liquidity would not effectively achieve the goal of risk reduction that diversification specifically addresses. Each of these objectives could lead to increased risk exposure rather than a balanced approach to investment.