What is a common goal when diversifying investments?

A common goal when diversifying investments is to reduce risk associated with market fluctuations. Diversification is a strategy that involves spreading investments across various financial instruments, industries, and other categories to mitigate the impact that a poor performance in any single investment or sector might have on the overall portfolio.

By holding a diverse range of investments, an investor can buffer against the volatility that can occur in specific markets. For instance, if one sector suffers a downturn, the losses may be offset by gains in another sector, leading to a more stable performance overall. This is distinct from aiming to maximize short-term returns or concentrating assets in a single industry, which may expose investors to greater risks. Minimizing the range of investment options would actually increase risk, as reliance on fewer resources can lead to greater exposure to negative market movements. Thus, the primary aim of diversification is to create a smoother investment experience through balanced risk management.