What does diversification in investing accomplish?

Diversification in investing is a fundamental strategy that involves spreading investments across various assets to reduce risk. By having a diversified portfolio, an investor can lessen the impact of poor performance from any single investment. Different asset classes, such as stocks, bonds, real estate, or commodities, often behave differently under various market conditions. When one asset class is performing poorly, another may be doing well, which helps to cushion the overall portfolio against volatility and potential losses.

This risk reduction is crucial because it aligns with the principle of not putting all eggs in one basket. Consequently, while diversification may not guarantee profits, it’s aimed at mitigating potential losses and stabilizing returns over time. This strategy is widely endorsed, as it promotes a more balanced approach to investing, rather than relying on the success of a single investment.

The other options, such as increasing potential returns only, guarantee profits in all market conditions, or eliminating the need for research, do not accurately represent the purpose or function of diversification.