Investopedia describes diversification as a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
In simple terms, diversification is encapsulated (I did say simple terms right?) by the old adage, “Don’t put all your eggs in one basket.” The rationale behind this being that you are not completely exposed should some unforeseen circumstance happen. For example, if a thief steals from one of your baskets (sidebar: make sure you get insurance on your baskets) then you still have other baskets to fall back on.