Diversification tends to minimize your losses. If you invested across several asset classes, your investment probably did not decline as much as it would have if you put all your investment into one class. Investing in both equity (stock) and fixed income (bond, money market, etc.) assets tends to reduce your loss in a market decline.

Diversifying among several investments is another way to reduce potential risk. It's important to build an appropriate mix of investments so that your overall mix -- or portfolio -- of investments can achieve maximum potential returns without exposure to more risk than you're comfortable taking.