Why is diversify good for investments?

Answer 1

The basic idea behind diversification is somewhat based on the old addage that "one should not put all their eggs in one basket" because if the basket were dropped all the eggs would likely be broken.

If an investor owns 10 stocks, it is not likely that all 10 stocks will go down in price. If you own 10 stocks and one stock drops in price by 10%, the average price drop for all 10 stocks will likely be much less.

There is another side of the diversification issue. If you own 10 stocks and one stock price goes up 50%, the average price of all 10 stocks will likely go up much less than 50%.

So, the issue of diversification provides some safety. It does limit losses if one stock goes down, but it also limits gains if one stock goes up.