In financial planning, what does diversification help to achieve?

Diversification is a fundamental strategy in financial planning aimed at minimizing risk in an investment portfolio. This concept involves spreading investments across various asset classes, sectors, and geographic locations. By doing so, if one investment performs poorly, others may perform well, balancing the overall risk and volatility of the portfolio.

Investors seek to reduce their exposure to any single asset or risk factor, which means that diversification helps protect against unforeseen market movements or economic downturns that could negatively impact a specific investment. This approach fosters a more stable financial outcome and is crucial for long-term investment success.

In contrast, pursuing concentrated investments could increase potential returns, but it also significantly raises risk. Higher wastage of resources isn't associated with diversification; rather, diversification systematically allocates resources to improve risk-adjusted returns. Lastly, while liquidity is important in financial planning, diversification does not inherently ensure quick liquidity of all assets, as the liquidity of individual investments varies.