Which investment strategy protects assets from market volatility?

Diversification across various categories is an investment strategy known for its ability to protect assets from market volatility. By spreading investments across a range of asset classes, sectors, and geographic areas, an investor reduces the exposure to any single investment or market factor. This means that if one category experiences a downturn, others may perform well, helping to cushion the overall portfolio's performance against market fluctuations.

This strategy operates on the principle that different investments react differently to economic events and market changes. For instance, while stocks may decline in value during certain economic conditions, bonds or real estate might rise, thereby stabilizing the investor's overall returns.

In contrast, concentrating investments in high-yield stocks can lead to significant risk, as these stocks tend to be more volatile and can suffer steep losses if the market shifts negatively. Short selling involves betting against a stock's price, which is inherently riskier and does not protect against market volatility but rather seeks to profit from it. Lastly, investing solely in government bonds, while often considered a safer option, lacks the potential for higher returns and might not provide adequate protection against all forms of market volatility since bond values can also fluctuate with interest rates and economic conditions.