Remember the Global Financial Crisis. Shares crashed. Listed and direct property crashed. Many of the traditional approachs to Portfolio Construction failed - and as a result, many investors lost a lot of sleep - because their overall portfolio had fallen a long way.
To make your portfolio more resilient - so you can sleep more securely, we need to include good investments that are not correlated to shares and property. That is what we seek to do in multiple way. We seek to include in the portfolio many highly-uncorrelated good investments. (Note: In times like the Global Financial Crisis, shares and property are highly correlated in terms of performance.)
A few key points:
Don't diversify for the sake of it.
Diversify between investments that each have a good chance of of positive return.
A key element investment selection should be valuation.
Ideally if shares or property, the sector you are in should in a secular bull market... if not, at least a cyclical bull market.
In other words, you should employ "intelligent" diversification. Some references:
The key reason to try to diversify intelligently, is that the more highly correlated your portfolio is, the more likely that you will find times when most of the key elements of your portfolio are down (as many investors found during the Global Financial Crisis). When investors face major losses across their entire portfolio, that is when "investors cut their losses because they cannot bear having such losses any longer." This one of the key reasons why many investors make the major mistake of buying high and selling low. http://puzzlefinancialadvice.com.au/Pics/140429_Investors_tend_to_buy_high_and_sell_low.JPG
As background, the investment theory behind diversification was defined by Professor Harry Markowitz: