Diversification is an investment strategy used to manage risk. Know the saying ‘don’t put all your eggs in one basket’? The saying is implying that if you put all your eggs in one basket your potential for risk is greatly increased, while if you diversify and put eggs in separate baskets your exposure to risk is decreased.
By diversifying your investment portfolio, whether over a number of stocks or spread across a number of asset classes, you are minimizing risk and potentially tapping into greater returns. Consider the damage if you invest in one company and it goes under versus investing in several companies and one goes under. The risk of loss is greatly reduced through diversifying.
The downside to diversification is the time it takes to manage the bigger portfolio, as well as the fees incurred when working with a number of asset classes. At the end of the day, each trader must determine what level of risk they are comfortable with and act accordingly.