Diversification has been a core investing principle for decades because it works. The basic logic is that when you spread money across different types of investments, a bad stretch in one area doesn't wipe out everything else. You're not trying to avoid all losses. You're making sure no single bad outcome does serious damage.
At its simplest, diversification means owning both stocks and bonds. Stocks tend to grow more over the long run but drop sharply during bad markets. Bonds are steadier and generate income, and they often hold up reasonably well when equities are falling. How much of each you hold depends on your timeline and how much volatility you can actually stomach. Someone with 30 years until retirement can handle more swings than someone who's retiring in five.
Within stocks, spreading across industries and countries matters too. Canadian investors tend to overweight Canadian companies, which isn't surprising, but Canadian stocks make up less than 3% of the global market. Staying home means missing out on most of what's out there. Adding U.S. and international holdings gives you exposure to sectors and economies that don't always move in lockstep with Canada.
Segregated funds and mutual funds are practical ways to get broad diversification inside an RRSP or TFSA without having to pick individual securities. Segregated funds in particular come with maturity and death benefit guarantees, which matters for people closer to retirement or those who want some protection built into their investments.
Diversification also requires maintenance. Markets shift over time and your original mix drifts. Rebalancing once or twice a year, trimming what's grown above your target and adding to what's fallen below, keeps your risk level where you actually want it.