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A diversified portfolio allows investors to avoid problems brought by reversals in the stock market by moderating the effect of the decline.

Wide diversification can be considered as a portfolio shock absorber. When the stock market is unstable, your portfolio is most likely to decline. But, with diversification, it won't go down as much as the market. If you are into investing for the long-term, decline in stocks is a great time to buy more as stocks are on sale.

If you own stocks from various asset classes, other parts of your portfolio will increase while stocks are going down. During these times, it would be best to sell the stocks that gained temporarily and use the money to buy more stocks. This is considered selling high and buying low.

If you have a broadly diversified portfolio, you don't need insurance in a declining market. The portfolio will become less and less volatile as you near your retirement age. This is a given design. College endowments and pension plans manage risk this way. Retirements should be too.

Diversification truly is a powerful tool. It is about owning whole markets through a wide range of ETFs. You should own those ETFs from different asset classes, like bonds, stocks, real estate, and even foreign investments. You should properly rebalance those funds as the market goes on a roller coaster motion.

This allows you to sell high and buy low. Try having 10 or 12 ETFs from across six to eight different asset classes. This is one of the best ways to have a diversified portfolio. This will also provide a better performance for your investments.

So why diversify your portfolio for a better retirement plan? First, a portfolio of broad-index funds gives you long lasting stamina and it also shields you from the market's up and downs.