What is the benefit of diversifying an investment portfolio?

The benefit of diversifying an investment portfolio lies in reducing overall risk by spreading investments across various asset classes. This strategy is grounded in the understanding that different asset classes—such as stocks, bonds, real estate, and commodities—react differently to market conditions. When one asset class is underperforming, another may be doing well, which helps cushion the overall impact on the portfolio.

By holding a variety of investments, an investor can minimize the negative effects of volatility in any single investment. This way, the potential for substantial gains from individual investments is maintained while also protecting against significant losses. Such diversification can lead to a more stable investment performance over time and aligns with the principle of risk management in investment strategies.

The other choices do not accurately reflect the key benefits of diversification. Focusing investment risk in a single area inherently increases risk rather than reducing it. While maximizing immediate returns might sound appealing, it typically involves higher risk that could lead to greater losses. Ensuring compliance with investment regulations is important, but it is not a direct benefit of diversification itself.