What is a "diversified portfolio"?

A diversified portfolio is a portfolio that has been invested across a number of different asset classes.  One of the several criteria used in selecting these asset classes is correlation.  Correlation refers to the behavior of each asset type (stock, bond, etc.) in different market situations.  If two assets are highly correlated to one another they can be expected to respond to market changes in similar fashion.  If the response is to drop in value, there is no diversification benefit to owning both assets. Instead, identifying assets that do not respond in mirror fashion helps to protect a portfolio by buffering the downward price movement of certain holdings.  If Stock A, for example, were to drop in price while Stock Z rose on the same economic news, they would be negatively correlated to one another and Stock X would help by gaining value to counter Stock A's loss.

In most cases, assets neither react in exact opposite nor move in lockstep fashion with each other. Typically, one holding will maintain value while another might gain or lose slightly. The objective is to be certain you're acquiring securities that can weather a financial storm better than any individual asset:  "Don't put all your eggs in one basket" applies to the financial markets. When a portfolio includes assets that are not highly correlated with other investments, a portfolio becomes more diversified and wealth is better protected from swings in market conditions.