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In the context of 401(k) retirement savings plans, diversification refers to the investment strategy of spreading your contributions among different types of investment options to reduce risk and potentially increase returns.

These options can include various asset classes such as stocks, bonds, mutual funds, index funds, ETFs, and potentially others, depending on the specific plan offered by your employer. Within these asset classes, you can further diversify by industry, company size, geographical region, and so on.

The idea behind diversification is that different types of investments perform well under different market conditions. By diversifying, you’re not putting all your eggs in one basket, so to speak. If one investment underperforms, others might do well, thereby balancing out potential losses.

The specific level and method of diversification that’s right for an individual depends on a number of factors, including their age, risk tolerance, financial goals, and the time left until retirement. It’s often recommended to consult with a financial advisor to develop a suitable investment strategy.