Why is diversification important in investing?

Diversification is important in investing because it helps to minimize risk by spreading investments across a variety of asset classes, sectors, or geographic regions. By holding a diverse portfolio, an investor reduces the impact of any single investment's poor performance on the overall portfolio. If one stock or asset performs poorly, the losses can be offset by better performance in other areas of the portfolio, leading to more stable returns over time.

This strategy is rooted in the principle that different assets often react differently to market conditions; some may perform well when others do not. Therefore, having a mix of investments helps to mitigate the risk of significant losses and can improve the chances of achieving a more consistent investment return over the long term.

In contrast, other options are less relevant to the principle of diversification. While diversification does not guarantee returns, it certainly is designed to manage risk more effectively. Additionally, it doesn't simplify tax filing since having various investments might complicate it. Lastly, diversification aims to minimize potential losses rather than maximize them by ensuring that an investor isn’t overly reliant on a single investment or asset class.