How do you know when to buy growth stocks? Value stocks? Technology stocks? Foreign stocks? Small-cap stocks?

The answer: You don't. Indeed, it is very difficult to time investments to take advantage of movement in any one particular stock sector. That's why it is important that investors maintain a diversified portfolio of stocks.

The concept of asset allocation is usually discussed in terms of diversifying your investments across different asset classes - stocks, bonds, etc.

As I have written in this column before, I'm not a huge fan of reducing risk by diversifying your investments across different asset classes. Why? Because to diversify means to hold things like bonds, which generally do poorly versus stocks over time. I would rather focus my investments on stocks and attempt to reduce risk (the aim of asset allocation) by lengthening my holding period.

However, a legitimate form of diversification, in my opinion, is diversifying across various types of stocks. By building a portfolio that includes both foreign investments, large-cap investments, small-cap investments, and growth investments assures you of having representation in industry sectors and stock groups that may be doing well at any particular time.

To be sure, during market periods like we saw in 1998 and 1999 - when technology and only technology was doing well - having a diversified stock portfolio will limit gains.

Still, if you think you will be able to pick consistently the sectors that will be the market leaders, you are likely to be disappointed.

What's a good breakdown for a stock portfolio? I think having at least 10% of a portfolio devoted to international stocks/mutual funds is a good start. I also think having 35%-45% devoted to small-cap and mid-cap stocks (market capitalizations of $10 billion or less) is reasonable, with the remainder focused on large-cap stocks.