What does diversification aim to achieve in a portfolio?

Diversification aims to spread investments across various assets or asset classes in order to reduce overall portfolio risk. By holding a mix of different securities, such as stocks, bonds, and other investments, an investor can mitigate the impact of a poor performance in any single investment. This strategy is grounded in the premise that different asset classes often behave differently under varied market conditions.

When one investment is underperforming, others may be performing well, which can help to stabilize returns and reduce volatility. This risk management technique helps to ensure that the investor is not overly exposed to any single economic event or market fluctuation, thus promoting more consistent performance over time.

In contrast, increasing the number of transactions may lead to higher costs without necessarily achieving better returns. Focusing on a single asset class increases the risk of underperformance if that particular area suffers a downturn. Maximizing return with minimum effort overlooks the importance of strategic planning and active management that diversification inherently requires.