For this simple illustration we will use 2 uncorrelated asset classes: US Equities and Money Markets.  

• Bob has 100% of his $100,000 invested in a US equities. 

• Sally has taken a 60/40 risk averse approach putting $60,000 in US equities and $40,000 in a money market fund.

In a sudden and sharp downturn, equities fall 30%.

• Bob's portfolio would lose 30% of it's value, and 

• Sally's portfolio would lose only 18% of its value [actually less, because she would also be earning interest on her money market funds].

While stocks are down, Sally is able to rebalance her portfolio.

• Sally re-establishes her 60/40 ratio by moving $7,200 from her money market into US equities [buying low].

• When the stock market returns to its original value, Bob would be back at $100,000, while Sally would have over $103,000 [actually more, because she would continue earning interest on her money market funds, and she would own more US equity shares that would earn additional dividends].

Summary of the benefits of diversification.

• Lessens losses in a down market—reducing pressures that cause mistakes [selling when the market is down].

• Enables you to buy low and sell high—automatically.

• Increase earnings with money market dividends, and dividends from additional shares purchased during a down market. 

• Losing less in down markets. 

• Earning more in flat markets.

• Using short and mid-term market fluctuations to produce higher returns in the long-term.