All investments involve risk. But when one type of investment does poorly, another type often does well.
Diversification means having money in all three types.
Though it doesn't guarantee you won't lose money, diversification can give you a better chance to participate in whatever type may be doing well at the moment. Just as different types of investments behave differently at different times, some have had higher returns over time than others. Stocks, for example, have historically outpaced bonds and short-term investments over the long term. It may also provide a higher return than bonds or short-term investments alone. Diversification also helps reduce the uncertainty that comes with the ups and downs of the stock market.