What does it mean to have a diversified investment portfolio?

Having a diversified investment portfolio means including a variety of asset classes, such as stocks, bonds, real estate, and perhaps alternative investments, to minimize risk. Diversification allows investors to spread their capital across different types of investments, which can reduce the impact of volatility and potential losses in any single asset class or investment. By not putting all their eggs in one basket, investors can achieve a more balanced risk-reward profile, which can lead to more stable returns over time.

For example, if one type of investment performs poorly, other investments in different asset classes may perform well, thereby cushioning overall portfolio performance. This approach aligns with the principle of modern portfolio theory, which advocates for diversification to optimize returns relative to risk. The key advantage of diversification is that it lowers the overall risk in the investment strategy while potentially enhancing the chance for gains through various market conditions.