If you diversify, you may be able to protect your portfolio against some of the risks of investing without giving up the level of long-term return that you're seeking.
That's possible because different subclasses within an asset class carry different levels of risk — sometimes referred to as risk-to-return profiles . If you select different investments within a number of subclasses, your portfolio of investments, as a group, can balance, or offset, the risk that any one investment might pose individually.
For example, the possibility of frequent or sudden changes in the value of a small company stock might make it a risky investment if that stock makes up a large percentage of your portfolio. But if your portfolio also includes blue chip stocks, the picture changes.
That's because the generally greater stability of the blue chips can help your portfolio maintain its value even if the small-company stock takes a nosedive but the stock markets overall are strong. At the same time, the growth potential of the small company stock can help balance the typically slower growth of the blue-chips.
Remember, the more narrowly focused your investments, the less diversified you are. And that can leave your portfolio more vulnerable to sudden swings in value — and increase your risk for significant losses.
Don Kittell
Don Kittell explains how diversification helps minimize certain types of risk.
The unique risk of an asset is known as unsystematic risk. This is the risk that characterizes only one individual asset, and it is a risk that can be eliminated through diversification. For example, the risk that the management of the ABC Corporation will make strategic blunders is unsystematic risk. Only ABC's managers have the ability to make internal decisions that can ruin the company's future. The managers of XYZ Co. have the ability to give their shareholders palpitations, but are likely to have very little influence on what happens at ABC, unless they are a direct competitor.
Risk that cannot be diversified away is known as systematic risk. This risk is inherent in all assets. It is caused by macroeconomic factors and will remain even in a diversified portfolio of assets. For example, a nationwide recession will affect most companies and is therefore considered systematic risk.
That's because the generally greater stability of the blue chips can help your portfolio maintain its value even if the small-company stock takes a nosedive but the stock markets overall are strong. At the same time, the growth potential of the small company stock can help balance the typically slower growth of the blue-chips. 
Don Kittell