Final answer:
Diversification is the strategy of spreading investments across various sectors and types of securities to reduce the risks associated with market volatility. It is akin to not 'putting all your eggs in one basket' and can offer a cushion during market downturns, although it does not guarantee against loss.
Step-by-step explanation:
The term that refers to making a portfolio less susceptible to market volatility is diversification. It involves investing in a broad range of companies rather than putting all your resources into a single stock or bond. Diversification is a risk management strategy that blends a wide variety of investments within a portfolio. The rationale behind this technique is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and pose a lower risk than any individual investment found within the portfolio.
Diversification helps to mitigate the risks of investing because the performance of different securities can vary independently. By spreading investments across various sectors and types of securities, investors can reduce the impact of a single security's poor performance on their overall portfolio. Conversely, while diversification can reduce risk, it does not guarantee against loss. For example, during significant market downturns such as the 2008 financial crisis, most types of investments fell in value simultaneously, but diversification still provided a cushion compared to holding a concentrated position in a few securities or sectors.
Financial advisors often analogize this strategy to the adage, "Don't put all your eggs in one basket," to emphasize the importance of spreading investments to reduce the risks associated with volatile markets. A well-diversified portfolio may include mutual funds, which pool money from many investors to purchase a diversified set of securities, thereby automatically providing diversity to the individual investor's assets.