What does it mean to diversify your investments?

Diversifying your investments means spreading your investments across a variety of asset types, which can include stocks, bonds, real estate, and other financial instruments. The primary purpose of diversification is to reduce risk. By not putting all your money into a single type of investment or asset class, you decrease the impact of a poor performance in any one area on your overall financial health. If one investment suffers losses, the other investments can help stabilize your portfolio and protect your overall wealth.

In contrast, investing only in real estate would focus your capital in one area, increasing your vulnerability to market fluctuations specific to that sector. Keeping all funds in a savings account does not provide the investment growth potential that diversification might offer. Similarly, buying stocks of just one company exposes you to significant risk, as your success relies on the performance of that single entity rather than a spread of various investments.