As the story goes, ancient Chinese merchants would ship their products down the river to the next town as part of normal trade. Farmers would ship their produce and livestock as well. The problem, however, was that accidents were waiting to happen and could strike any ship at any time. An entire season's harvest could be ruined all at once. Merchants became wise and split their goods between 10 ships. This obviously increased the chances that a ship carrying some of their goods could sink, or be stolen, or ruined somehow. But, the rest of the ships would make it, and the small loss was part of doing business in order to ensure that most of the goods reached their destination. This is insurance in it's basic form. It is also an example of diversification.
Most people have their retirement funds in stocks and bonds. Much is heard about mutual funds as the pathway for diversification. But the stock market, while divided up into different sectors, still consists of stocks. They are part of the stock universe. Some may disagree, and say that a variety of stocks is all you need. At any rate, the entire stock market can fall in the aggregate. Electronic trading can accelerate this, as selling spills over from one sector to another. Some sectors are more stable than others, some more volatile than others. The market can get disturbed easily, and there are numerous examples of very large drops in the stock market, slow and fast, such as occurred in 1929, 1973, 1980, 1987, and 2000. Drops in the 20 - 60% range, which have occurred routinely, correspond to the sinking of 2 to 6 out of 10 boats! After the 1929 crash it took 28 years before the market recovered to its pre-crash high. In 2000, popular stocks inevitably filled the portfolio of popular mutual funds. Stock market 'gurus' led the choir in unison as they sang of the wonders of technology stocks. Fundamentals were ignored. The technology boom of the 1990s, cheered on by stock analysts, ended with wild stock overvaluations and subsequent 80% collapse, especially in the NASDAQ. The ridicule is still fresh in my memory as a few of us had the nerve to warn others of the frothiness in the stock market, and pulled out to greener, safer pastures.