Introduction to The Importance of Diversification
Avoiding risk is difficult no matter how you choose to invest. Most investors are aware that you must take greater risks to achieve higher returns. However, no one wants to take more risk than necessary to achieve one's financial goals. Diversification helps reduce risk.
There are some risks investors take for which they expect to be rewarded. Other risks are so haphazard that they cannot be rewarded, nor should investors take them. It is the latter kind of risk that investors eliminate through diversification. Savvy investors don't take risks for which they don't get paid.