What benefit does diversification provide to an investor holding a variable annuity?

Diversification offers significant benefits to an investor holding a variable annuity by helping to balance potential risks and rewards across various investments. By spreading investments across multiple asset classes—such as stocks, bonds, and cash equivalents—diversification aims to reduce the overall risk associated with the portfolio. This is particularly important in the context of variable annuities, where the value of the investment can fluctuate based on market performance.

When an investor diversifies, they are less likely to experience severe losses from any single asset class, as poor performance in one area may be offset by better performance in another. This balanced approach allows investors to pursue growth potential while managing the volatility that comes with investing in various markets. The strategy acknowledges that while risks cannot be completely eliminated, they can be mitigated through thoughtful allocation of resources across a broad range of investments.

This understanding underscores the importance of diversification as a key principle in investment strategy, especially within products like variable annuities that inherently possess market exposure.