What is the primary goal of diversification in investing?

The primary goal of diversification in investing is to reduce overall risk. Diversification involves spreading investments across various asset classes, sectors, or geographical regions rather than concentrating them in a single area. This strategy helps mitigate the impact of poor performance in any one investment or sector. When one investment underperforms, others may perform well, balancing out potential losses.

By diversifying, investors aim to achieve a more stable and reliable portfolio performance over time, as different investments react differently to the same economic events, leading to lower volatility and a reduced risk of significant losses. This principle is crucial for building a resilient investment strategy that can withstand market fluctuations.

In contrast, guaranteeing profits is not a feasible outcome of any investment strategy as all investments carry some degree of risk. Focusing investments in one sector increases exposure to sector-specific risks, while increasing costs does not align with the fundamental objective of diversification, which is to optimize returns while minimizing risk.