What is a diversified portfolio?

A diversified portfolio is an investment strategy that spreads risk across various assets. This approach is designed to reduce the impact of any single investment's poor performance on the overall portfolio. By allocating funds to different asset categories, such as stocks, bonds, real estate, and possibly commodities, an investor can mitigate risk because these various assets often react differently to market conditions.

When one type of investment performs poorly, others may perform well, helping to stabilize returns. Diversification helps investors achieve more consistent results over time, avoiding the vulnerability that comes from putting all resources into one asset or asset class. This strategy is a fundamental principle in investment management, aimed at balancing risk and reward.

The other options describe strategies that do not offer the benefits of risk management and stability that diversification provides. For example, focusing on a single asset or investing only in high-risk stocks can lead to severe losses if those particular investments falter. Keeping investments solely in cash may seem safe but does not typically offer growth potential, particularly in inflationary environments.