I'm not a huge fan of diversifying portfolios across a variety of asset classes. I prefer to lower the risk of my portfolio via time diversification. That is, I reduce the volatility of my portfolio by lengthening my holding periods for stocks.

Still, one diversification strategy that does make sense is diversifying across different types of stocks.

Given the strength of the tech sector in 1998 and 1999, the temptation would have been to load up on tech stocks and nothing but tech stocks. Had you done that, 2000 would be a fairly painful year. However, while the tech stocks have swooned this year, many non-tech sectors have been performing well. The investor who held non-tech as well as tech stocks in a portfolio is finding himself or herself in much better shape than the investor who held nothing but tech.

It is also important to diversify a stock portfolio across different sizes of companies - small, mid-sized, and large company stocks. Why? Because at any given time, one of these groups may be doing well. Today, mid-sized stocks have been giving good accounts of themselves. An investor who owns nothing but large-company stocks would not be benefiting from the strength in the mid-cap sector.

Finally, I still believe having investments in foreign stocks is a good way to enhance the diversification of a stock portfolio. True, foreign stocks tend to be volatile. However, when held within a diversified portfolio, studies show that foreign stocks enhance a portfolio's risk/return ratio. How can you buy foreign stocks? Actually, with the advent of American depositary receipts (ADRs), it has never been easier for U.S. investors to buy foreign companies. You can buy ADRs via your BUYandHOLD account.