Diversification is simply a way of reducing investment risk by spreading your money across different types of investment. The key lies in the combination of assets you choose. This is because the different asset classes are affected by different influences, such as supply and demand, and interest rates, which mean their value can fluctuate. To help reduce the potential for poor performance that comes from selecting just one asset class it is advisable to spread the risk to your money by holding a range of assets, and where possible, investing in different funds.