Diversification refers to an investment strategy aimed at managing and reducing risk by spreading your investments across a wide range of assets. This approach involves not just investing in different asset classes like stocks, bonds, and cash equivalents, but also diversifying within those classes. For example, within the stock portion of your portfolio, you might invest in a variety of industries such as technology, healthcare, and consumer goods. Similarly, within bonds, you might diversify by including government bonds, corporate bonds, and municipal bonds.

The primary goal of diversification is to mitigate risk by ensuring that your portfolio doesn’t rely too heavily on any single investment or type of investment. By holding a mix of investments that respond differently to market conditions, the positive performance of some assets can help balance out the negative performance of others. For instance, when the stock market is down, bonds might perform better, helping to cushion your overall portfolio from severe losses.

Moreover, diversification isn’t just about asset classes and sectors; it can also involve geographical diversification by investing in both domestic and international markets. This broad approach helps protect your retirement savings from the volatility of any one market, industry, or region.

Ultimately, diversification is a key principle in creating a more stable and resilient portfolio, aiming for more consistent returns over time while minimizing the impact of any single investment’s poor performance on your overall retirement savings.