Most people understand the idea of not putting all your eggs in one basket. Diversification reduces portfolio risk by spreading your money across a number of stocks.
In 1952, Ben Graham wrote about another benefit of diversification that doesn’t get talked about as much:
In this connection I want to throw out a broad and challenging idea — that from a scientific standpoint common stocks as a whole may be regarded as an essentially undervalued security form. This point grows out of the basic difference between individual risk and overall or group risk. People insist on a substantially higher dividend return and a still larger excess in earnings yield for common stocks than for bonds, because the risk of loss in the average single common stock issue is undoubtedly greater than in the average single bond. But the comparison has not been true historically of a diversified group of common stocks, since common stocks as a whole have had a well-defined upward bias or long-term upward movement. This in turn is readily explicable in terms of the country’s growth, plus the steady reinvestment of undistributed profits, plus the strong net inflationary trend since the turn of the century.
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