#Diversification refers to the investment strategy of spreading investments across various financial instruments, sectors, or asset classes to reduce the risk of a portfolio. By holding a variety of investments, an investor can minimize the potential negative impact of a poor-performing asset or market sector.
To put this into context, let's consider cryptocurrencies as our financial instrument. Suppose you're planning to invest $100, and your strategy is to #HODL . To diversify your investment portfolio, you should spread your capital across multiple assets, aiming for long-term return on investment #ROI rather than placing all your initial capital into one asset.
This approach helps mitigate the risk of losing your capital if a chosen asset in your portfolio underperforms. Other chosen assets that are performing well weigh in for the underperforming assets creating a balance ultimately helping an investor realise profits.
On the other hand putting all your eggs in one basket— Investing in one asset, might result to greater financial risk and in some cases loss of investment capital or liquidation if the single asset chosen underperforms with no signs of potential recovery.
