What does the principle of diversification in portfolio management aim to achieve?

The principle of diversification in portfolio management aims to spread risks across various assets. This strategy involves investing in a wide range of assets, which reduces the impact of any single asset's poor performance on the overall portfolio. By diversifying, an investor can lower the volatility of their portfolio and mitigate potential losses.

When one asset class or sector may be underperforming, others may be doing well, balancing the overall returns of the portfolio. This concept is rooted in the idea that not all assets will move in the same direction at the same time; hence, a diversified portfolio can provide more stable and consistent returns over time.

While maximizing returns on individual assets or focusing on high-risk investments may appeal to certain investment strategies, they do not align with the fundamental idea of spreading risk, which is the core benefit of diversification. Similarly, investing only in high-performance assets could lead to concentrated risks, thereby negating the purpose of having a diversified investment strategy.