Imagine you are in a casino and are about to play roulette. You can choose to put all your chips on a single number. If you win, you will win big and if you lose, you lose everything.
Another option is to spread your chips onto several spots, giving you a higher chance of winning something but at the same time ensuring you cannot win as big as you could have if you had put all your chips on one spot.
Which option are you more likely to choose? If you pick the second option, you are choosing to diversify your risk.
Vanguard Group Founder, John C. Bogle, may he rest in peace, famously said, “[d]iversification is not only the first important thing investors should think about, but the second and the third, and probably the fourth and fifth, too.”
There is no such thing as a risk-free investment. There are, however, many ways to lower your risk: getting smart about investing is one way; avoiding strategies and schemes that are really gambling is another.
The word that describes the totality of all your investments is “portfolio.” Making sure your portfolio is properly diversified is, as John Bogle preached, one of the most important things you can do to minimize your investment risk. To use a metaphor, don’t put all your eggs in one basket. To learn more, read Investing Basics for Beginners Installment #3: Never Put All Your Eggs in One Basket by Jonathan Friedland.