What is the primary purpose of diversification in investing?

The primary purpose of diversification in investing is to minimize potential losses. Diversification involves spreading investments across a variety of asset classes or sectors, which helps reduce the impact of a poor-performing investment on the overall portfolio. By having a mix of different asset types, such as stocks, bonds, real estate, and other securities, an investor can mitigate the risks associated with any single investment.

When one investment underperforms, the other investments may still perform well, thereby balancing out the overall performance of the portfolio. This strategy does not eliminate all risks, as all investments carry some level of risk, nor does it guarantee returns. It is also not primarily focused on maximizing profits; while a diversified portfolio can lead to more stable returns over time, its main objective centers on providing a more balanced approach to risk management.