Diversification prevents 100% losses. That is the point. Many here are correct that it doesn't increase expected returns. It does however dramatically lessen the chances of unrecoverable losses. A well diversified stock portfolio can see 40-50% drops. It will not see 100% drops unless the world ends... in which case who cares about their stock portfolio?
An individual security has the same expected returns as its asset class, but it has the potential downside of 100%.
Apple had the expected returns of the SP500. It did much better.
Enron also had the expected returns of the SP500. It is gone.
You are taking infinitely more risk(the risk of 100% losses) for the slim chance of higher expected returns. I don't get it.
To use an analogy. Its like the air bag & seat belt in your car. If you get in a wreck you want to have that air bag 99.9999% of the time. Sure it hurts your face/shoulder to hit it. You may even go to the hospital for a few days(40-50% temporary losses) but it is better than death(100% losses) or extreme injuries you can't recover from(95% losses). However there is that very very very slim(0.00000000000001%) chance that after a wreck your windshield pops off and you fly through the opening and over the car in front of you without a scratch and land in the back of this.....
Technically it could happen. Technically you could have bought Apple in 1985 based on dumb luck, never bought any other company, and be stupid rich today(I actually know the person who did this). However there is a much greater probability you would end up owning something average(don't get in a wreck) but with much more risk, or that you bought something that crashed(Enron, Lehman Brothers, WorldCom, Wachovia, Bear sterns, etc.).