As I mentioned yesterday (Clearing the Forest), one of the beneficial results of the current economic crisis will be the clearing of the excesses which built up like plaque in the financial arteries of our markets.
You should want the same thing in your portfolio as you do in your diet: healthy, high quality, minimally processed, and with few additives. Avoid sugar, polyunsaturated fat, and hedge funds.
Unfortunately, many of these entities are even now viewed by financial advisors as alpha producing diversification vehicles. Fund-of-Funds, Private Equity, Managed Futures, etc. Got some in your portfolio? I'll bet that diversification into the commodity fund was only diversified to the extent that it gave you an additional source of capital loss in the past year.
In bear markets, you want to build a portfolio of stocks and bonds. High quality individual stocks and bonds. Not funds. Not partnerships with names like Pegasus Global Macro Leveraged Opportunities LP.
When we eventually return to a sustained bull market, there will come a time to look at more aggressive investments (e.g., smallcap growth). But not yet.