What does diversifying investments mean?

Diversifying investments means spreading money across multiple accounts or investments, which helps to reduce risk. By holding a variety of assets—such as stocks, bonds, real estate, or different sectors within the stock market—investors can mitigate the impact of poor performance in any single investment. This strategy is based on the principle that different investments will perform differently under various economic conditions, thus balancing the overall portfolio risk and potential returns.

Investing in a single stock or focusing solely on domestic stocks can increase vulnerability to market volatility and specific company performance. Similarly, investing only in technology companies exposes an investor to sector-specific risks, which can lead to significant losses if that sector underperforms. Hence, diversifying is a fundamental investment strategy that helps create a more stable and resilient financial portfolio.