Diversification isn't a magic bullet.

Having a diversified portfolio doesn't mean you'll never lose money. Diversification doesn't mean complete protection from short-term dips or market shocks. Diversification does not guarantee that if one investment goes down another investment will go up-it isn't a seesaw.

2008 illustrated this point. The height of the financial crisis was an absolutely wretched time for investors; the average U.S. stock fund lost almost 39% that year. The average foreign-stock fund lost 45%. Funds that bought emerging-markets stocks were down 55%. Real estate funds tumbled almost 40%, while precious metals funds slid 30%. Even bond funds (with the exception of Treasuries) were in negative territory. The lesson: Because all sorts of investments can suffer at the same time, your only sure-fire protection against sudden losses is to put some of your assets in a money market fund.

Next: Ways to Diversify >>