Most of us learn very early in life that you shouldn't put all your eggs in one basket.

That simple statement is the basis for portfolio diversification. Diversification means owning investments whose returns are not closely correlated. The thinking behind diversification is that, if one group of investments you own is going down, other investments might be going up.

In short, diversification is a risk-reduction strategy, not a profit maximization strategy.

In recent years, investors who diversified their portfolios with large-cap stocks, small-cap stocks and international stocks have gotten exactly what they wanted — a portfolio of investments with noncorrelated returns. While small-caps and international stocks have been weak, large-cap stocks have been off to the races.

The funny thing is that, during the high-octane markets we've had in recent years, diversification has turned into a dirty word for investors. Indeed, to be properly diversified has meant being a market laggard, and who wants to be that?

That the concept of diversification has fallen into disrepute is truly a bull market phenomenon. When markets are skyrocketing, risk reduction is not the mantra of the day; maximizing gains is. Thus, you don't diversify if you're smart. You put all your eggs into one basket (the preferred basket has been the S&P 500) and watch that basket go higher, and higher, and higher.

Of course, long-time market watchers know that things change. Perhaps not tomorrow or next year. But at some point, things change. That's why you diversify — because you know things change, but you don't know when. For that reason, I have roughly 40% of my 401(k) in such things as foreign investments and small- and mid-cap stocks. Have these asset classes held back returns in recent years? You bet. But in the end, I still believe diversification works.

Now don't get me wrong. Owning 50 stocks, 12 mutual funds, baseball cards, Monets, and an ostrich farm is not my idea of being diversified. Too much of a good thing, even diversification, is not good for you. I think investors can be properly diversified owning 13-17 stocks, especially if they also own a few mutual funds.

One of the beauties of BUYandHOLD is that it provides a way for investors to build a reasonably diversified portfolio — across large-cap, small-cap, and international stocks — with very little money. Indeed, with just a few thousand dollars, investors can quickly build a portfolio of 10-15 quality stocks.