LifeX Practice Test

Diversification in investing refers to the strategy of spreading investments across a variety of assets or asset classes to mitigate risk. By not putting all funds into a single asset or type of investment, investors can protect themselves from significant losses should one particular investment perform poorly. The idea is that different assets often react differently to the same economic event. For example, if you invest in stocks, bonds, real estate, and commodities, the performance of one asset might balance out the underperformance of another. This approach can lead to more stable overall returns and helps to achieve a more resilient investment portfolio over time.