A diversified portfolio is important because it minimizes risk. By spreading your investments across different assets (like stocks, bonds, or real estate), you reduce the impact of a poor-performing investment on your overall portfolio. For example, if you invest $10,000 and put $2,000 in five different stocks and one stock drops significantly, only $2,000 is affected instead of your entire investment. This can help stabilize your returns over time.

Diversification is the strategy of spreading your investments across various financial instruments, industries, and other categories to reduce risk. The idea is that the performance of different investments will not be correlated, so when one investment is down, another may be up, leading to a more stable overall return.