The practice of spreading investments across many different assets, sectors, or geographies, so that poor performance in any single one has a limited effect on the overall portfolio.
If you put all your savings into one company's stock and that company has a terrible year, your entire net worth has a terrible year with it. Spread that same money across hundreds of companies across different industries and countries, and one company's bad year barely registers — because dozens of others are likely doing fine, or great, at the same time. It's the classic "don't put all your eggs in one basket," applied to money.
Owning a single ETF that tracks the S&P 500 instantly diversifies you across roughly 500 companies and multiple industries — versus owning shares in just one or two companies, where a single bad earnings report could meaningfully dent your entire portfolio.