Diversification is one of the fundamental concepts of investing and a critical element to portfolio construction. The research and practical application both suggest that a portfolio made up of many different kinds of investments (stocks, bonds, real estate, commodities, cash and others) will do better than a portfolio of just one stock or a few stocks. Diversification can get quite complicated once you get past the basics, so if you really want to dig in, check out the book suggestion on the right.
With a diversified portfolio of many different investment types, you get a smoothing effect. The performance of the winners offset the performance of the losers and your overall portfolio will be less volatile, both on the upside and the downside. It won't drop as much when markets tumble, but it won't rise as high when markets rally. The key point is that diversification is a great tool for managing risk and smoothing out returns over long periods of time.
Different assets have different periods of strength and weakness and we continually monitor many different investments to try and optimize the mix of investments in a portfolio.
We recommend Portfolio Selection: Efficient Diversification of Investments by Markowitz.