DECA Financial Consulting Practice Exam

Diversification is a fundamental investment strategy that helps protect against investment losses by spreading investments across various assets, sectors, or geographical areas. When an investor diversifies their portfolio, they reduce the risk associated with any single investment. This is because the performance of different assets often varies. For instance, if one asset class, such as technology stocks, underperforms, other classes, like bonds or consumer staples, may maintain or increase in value, thus mitigating the overall impact of the loss.

By avoiding concentration in a specific investment, diversification helps to buffer the portfolio against significant declines in value, leading to more stable and predictable returns over time. This risk management technique is particularly beneficial in volatile markets, where certain sectors can experience drastic fluctuations. Hence, the protective nature of diversification makes it a key strategy for investors looking to safeguard their investment capital.