Which strategy is recommended for diversifying an investment portfolio?

Investing in different types of investments is a fundamental strategy for diversifying an investment portfolio. This approach helps to spread risk across various asset classes, such as stocks, bonds, real estate, and commodities, instead of concentrating funds in a single area. By diversifying, an investor can reduce the impact of poor performance in any one investment, as losses in one area may be offset by gains in another.

For example, stock investments can be volatile, and if a stock market downturn occurs, the losses can be significant. However, if an investor also holds bonds or real estate, those assets might not be affected in the same way and can provide a buffer against losses in the stock market. This is particularly important since different investments can react differently to economic changes, interest rates, and market conditions, making diversification a key strategy in managing overall portfolio risk and performance.

In contrast, investing in a single high-performing stock, focusing solely on real estate, or concentrating investments in one particular sector can lead to a lack of diversification. Such strategies expose investors to higher risks, as the performance of their portfolio would be overly reliant on specific investments, which could underperform or decline significantly.