In terms of investment strategy, what is diversification aimed at?

Diversification is an investment strategy focused on minimizing risk by spreading investments across various assets. The underlying principle here is that different assets often react differently to market conditions. For example, when one asset class, such as stocks, may be underperforming, others, such as bonds or real estate, may be performing well. By diversifying a portfolio, an investor can reduce the overall risk and volatility, as the poor performance of some investments can be balanced out by the better performance of others.

This strategy is grounded in the idea that not all investments will move in the same direction at the same time. Therefore, having a mix of investments—such as stocks, bonds, cash, and real estate—ensures that if a particular sector experiences a downturn, other sectors may remain stable or even thrive, ultimately leading to more consistent overall portfolio performance.

Enhancing short-term gains, maximizing impacts from single sources, and improving tax efficiency do not align with the fundamental concept of diversification. These alternatives either focus on high-risk strategies, emphasize concentration in specific investments, or solely consider tax implications, rather than taking a holistic approach to balancing risk through varied asset allocation.