Excerpted from Bogle on Mutual Funds by John C. Bogle, pages 52-53

Mutual funds provide not only diversification within a portfolio but also diversification among portfolios. For instance, the same $5,000 that was insufficient to purchase even one bond could, in many instances, purchase both a diversified stock mutual fund and a diversified bond mutual fund. If you are a young investor with limited finances just beginning to set aside funds for your retirement, the ability to diversify among stocks and bonds is a significant advantage.

It is impossible to overstate the critical role of diversification in an intelligent investment program. Diversification greatly reduces and can even eliminate the specific risk that comes with the ownership or just a few individual stocks and bonds. (Even a broadly diversified portfolio, however, cannot eliminate the market risk of price volatility.) Yet, with this substantial reduction in risk, there is no loss whatsoever of long-term return for investors in the aggregate. Diversification, then, is at the very heart of mutual fund investing.