What does "diversification" mean in retirement investing?

Diversification in retirement investing refers to the strategy of spreading investments across various asset classes, such as stocks, bonds, and real estate, to reduce overall risk. By not putting all funds into a single investment type, investors can mitigate potential losses, as different assets perform differently under varying market conditions. For instance, when stocks may be underperforming, bonds or other asset classes might do well, thus balancing out the overall portfolio value. This approach helps ensure that an investor's retirement savings are more resilient, safeguarding against significant downturns in any single market segment and encouraging stable, long-term growth.

The other choices present strategies that lack the balance and risk mitigation inherent in diversification. Investing solely in high-risk stocks or focusing on one type of investment can lead to significant losses if that sector performs poorly. Similarly, restricting investments to only government bonds may limit growth potential, especially during favorable market conditions for other asset classes. Thus, the comprehensive strategy of diversification is critical for effective retirement planning.