Diversification is the practice of spreading your investments across different types of assets or securities to reduce risk. By diversifying your portfolio, you can potentially minimize the impact of any one investment performing poorly. For example, if you only invest in one stock and that company experiences financial difficulties, you could lose a significant amount of money. However, if you have a diversified portfolio that includes stocks, bonds, and other assets, the impact of any one investment performing poorly is likely to be less significant.