A few recent readings about the crash of '08-'09 has led me to this post. Investors wishing to diversify away from all market volatility are foolish indeed (an impossible task); it can't be done at times of violent market movement. Investors panic en-masse in those times, so traditional measures of relative correlation totally dismember.
What diversification does, is during relatively normal times, involving single stock fluctuations of 30-40% per annum (eg normal variations), is produce more stable returns during those periods. Even during some periods of somewhat greater than average relative market strength or weakness, it the chance for those non-correlations to hold together, producing those more stabilized returns, that most investors prefer.