What is the main goal of diversification in an investment portfolio?

The main goal of diversification in an investment portfolio is to mitigate risk by spreading investments across various asset classes. By holding a mix of different assets—such as stocks, bonds, and cash—investors can reduce the impact of any single investment's poor performance on the overall portfolio. This strategic allocation helps to balance risk and reward, as the performance of the different asset classes often varies in different market conditions. Consequently, when one asset class is underperforming, another may be thriving, providing a buffer against volatility and potential losses.

Focusing on a single investment strategy or asset prevents the benefits of risk reduction that diversification offers, inherently concentrating exposure and increasing volatility. Similarly, striving for the highest profit from a single asset might lead to significant risk, as it disregards the stabilizing effect of a diversified approach. Investing solely in volatile markets for quick returns can also be highly risky and is generally not sustainable in the long term, contradicting the fundamental purpose of diversification, which is to create a more resilient portfolio over time.