Why diversification works
If you put all your money in a single company and it collapses, you lose everything. If you spread the same money across 50 companies, even a total wipe-out of one only costs you 2%.
Spread it further — across countries, sectors, and asset types — and a bad year in one area is usually offset by a better year in another.
How to diversify as a beginner
The easiest way is a single broad-market ETF, which already holds hundreds of companies across sectors. Add an international ETF for global exposure. Add a bond ETF for stability. That is a diversified portfolio in three buys.
Diversifying does NOT mean owning 50 random tech stocks. If they all crash together, you were never diversified.
Limits of diversification
Diversification reduces specific company risk but cannot remove market risk. When the whole market falls, almost everything falls together. This is why time horizon matters as much as diversification.