The Importance of Diversification
Diversification can be viewed in terms of its effect on an investors risk/return profile. A portfolio which is 100% invested in the shares of one company is 100% exposed to the risks and returns of that holding. However, a portfolio which combines a variety of different investments can have the effect of reducing the overall risk of the portfolio by spreading this risk across a range of companies.
Diversification is important because individual securities, sectors, regions or asset classes may perform strongly in one year and poorly in the next. A diversified approach allows an investor to capture the broader performance of multiple assets.