What is the main purpose of diversifying investments through asset allocation?

The primary purpose of diversifying investments through asset allocation is to minimize the potential impact of losses. Diversification involves spreading investments across various asset classes—such as stocks, bonds, and real estate—in order to reduce risk. When one asset class performs poorly, the other classes may perform well, balancing the overall performance of the investment portfolio. This strategy aims to reduce the volatility of returns and safeguard against significant losses, ultimately enhancing the investor's long-term financial stability.

The other options do not align with the principle of asset allocation and diversification. Investing solely in stocks can increase risk, as it lacks the protective benefits of a balanced portfolio. Increasing exposure to risk contradicts the strategy of diversification, which seeks to mitigate risk. Lastly, avoiding international markets limits diversification opportunities, as global investments can provide better growth potential and further reduce overall risk. Diversification is about managing risk effectively through a well-rounded approach to investment selection.