What is diversification in investment for a small business and why is it relevant?

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Diversification means spreading investments across different assets so no single investment dominates the portfolio. By not putting all money in one place, a downturn in one asset won’t drag the whole portfolio down as much, helping returns stay steadier over time. For a small business, this matters because capital is often limited and cash flow can be volatile. A mix of assets with varying risk and return profiles can cushion against swings in any one area and support more reliable funding for day-to-day needs. While diversification won’t guarantee high profits, it aims to stabilize performance and protect capital, making it more effective for maintaining steady returns than concentrating funds in one asset, trying to time the market, or keeping everything in cash.