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Everybody wants to invest money to earn higher returns. At the same time, they want to avoid risk. Risk cannot be avoided, but it can be reduced through diversification.

Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The logic behind this financial technique contends that a portfolio of different kinds of investments on average will yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments neutralizes the negative performance of others within a portfolio. The benefits of diversification only occur if the securities in the portfolio are different investments at all times.

The procedure each investor decides to diversify is through a process called asset allocation. Investors are constantly told to diversify their p