Diversification
Diversification is spreading investments across many assets, sectors or regions so that poor performance in one holding has a smaller effect on the whole portfolio.
The idea is captured by the saying 'don't put all your eggs in one basket.' A single company can go bankrupt, but a portfolio of hundreds of companies is unlikely to see all of them fail at once. Combining assets that do not move in perfect lockstep reduces the overall volatility of the portfolio.
Diversification can happen at several levels: across individual stocks, across sectors such as technology and health care, across countries, and across asset classes such as stocks, bonds, real estate and cash. Index funds and ETFs make broad diversification inexpensive.
It mainly reduces company-specific, or unsystematic, risk. It cannot remove market risk: in a broad crash, most stocks fall together, and correlations between assets often rise during crises.
Example: an investor with all savings in one stock could lose most of it if that company fails. An investor holding an S&P 500 fund owns about 500 companies, so even a complete loss in one of them typically has only a small effect on the total.