I do not understand the benefit of diversification, at least in the long-term, until you start to get reasonably close to withdrawing money. Over the long-term, I understand the market to provide the highest return of any asset class. I always understood diversification to be a strategy to have money in different pots so that when you wanted to withdraw money, you could pull from the pot that is doing the best. So, it would seem to me that if I'm looking at 20 years out, putting money in bonds, etc. would be expected to provide a significantly lower return that probably would be too big a cost to justify the increased diversification when pulling out money 20 years hence. I also guess (educated, I hope) that over the long-term, international stocks no longer add much valuable diversification given that surely all of the top 500 U.S. companies are fully extended into international markets (Apple sells iPads everywhere).
What am I missing? It seems like if I'm building my money for 20 years out, total market index provides me the highest expected return, and I can just add bonds (or cash) the last 5 years to provide some cushion so that I have a place to pull some money if stocks are really depressed. It seems unlikely to me that stocks would stay hugely down for more than 4-5 years from the time you need it such that it would start to have a detrimental effect on your overall portfolio.
In all fairness, I do have everything paid off, so I'm just looking at my investment portfolio. But I see enough references to the need for asset allocation across the board (i.e., not limited to the period as you're closing in on needing it) that I'm not sure what I'm missing in the analysis.