Having a diversified portfolio means spreading your investments across different asset classes (like stocks, bonds, and real estate) to reduce risk. For example, if you invest $10,000 and allocate $5,000 to stocks, $3,000 to bonds, and $2,000 to real estate, you protect yourself from significant loss if one asset class does poorly. If the stock market drops by 20%, you might lose $1,000 in stocks, but your bonds and real estate may still perform well, keeping your overall loss smaller. This balance helps maintain and potentially grow your investment over time.

Diversification is the practice of spreading your investments across different types of assets to reduce risk. By not putting all your eggs in one basket, you can minimize the impact of poor performance in any single investment on your overall portfolio. It’s a fundamental principle in investing that helps protect against market volatility.