Lexicon
Diversification
Not putting the whole outcome in one basket's hands.
Diversification is spreading investments across different assets, sectors, companies, or geographies, so that a poor outcome in any single holding has a limited effect on the value of the portfolio as a whole.
The mechanism behind it is that different assets don't all move together at the same time for the same reasons. A downturn specific to one company, one industry, or one country doesn't necessarily show up the same way somewhere else. Holding a mix means the parts of the portfolio doing fine can offset, at least partly, the parts that aren't.
Diversified in name only
A portfolio of ten different stocks isn't automatically diversified if all ten are technology companies exposed to the same set of risks — a downturn hitting one is likely to hit the rest at the same time, for the same reasons. Real diversification comes from holding things that respond differently to the same event, not simply from holding a larger number of things.
What it doesn't do
Diversification reduces the risk specific to any one holding, but it doesn't eliminate risk that affects the market broadly. A well-diversified portfolio of stocks still falls in a broad market decline, because the risk being diversified away is the risk of any single company or sector, not the risk of owning stocks at all. An index fund is a simple, common way to get broad diversification in a single purchase, since it spreads exposure across hundreds of companies at once rather than concentrating it in a handful.