The benefits of diversification are vastly overstated. Especially over long time periods, the benefits of buying e.g. your 5 best ideas rather than your 10 best ideas vastly outweigh the benefits of having less volatility. If you have time to do the research, do this: find companies that are either the low-cost provider, the most-loved brand, or have special government-protected status in their industry. Examples would be Coca-Cola, Wal Mart, Kraft, etc. Possibly, rule out companies whose managers make irresponsible financial decisions (like over-leveraging at a bank, or buying back stock at high prices like Coca-Cola). When these stocks are cheaper than the broader market, buy them. If one of them rises enough that, after capital gains taxes, you're getting more annual earnings per dollar invested in another company of similar or better business characteristics, sell the expensive one and buy the cheap one.
Basically, your goal should be to have a portfolio you don't have to follow, of companies that will tend to grow their earnings faster than their capital and thus throw off free cash for shareholders. If you can get these at a fair price, your net worth should grow nicely.
However, this is difficult to articulate and extremely hard advice to follow. Perhaps it would be better to put most of your money in an index fund, and do this with the rest of your money long enough to see if it works for you. Sadly, this kind of strategy should be judged over a longer time period (like five years). So, index fund or take your chances.
I do follow this strategy, but I also invest in weird little situations that don't fit into it (e.g. a small, post-bankrupt manufacturing company with a hugely overfunded pension, managed by a billionaire trader). I don't like to discuss specifics of what I invest in now. However, stuff I bought in the past includes NDAQ and IBA; huge mistakes include buying MOVI and MGAM (I sold for more or less unrelated reasons), and not-buying DAKT (I sold after a good earnings report -- it's up 150% since then) and not-buying AAPL (I was researching it, then they announced their first million songs sold through iTunes, the stock went up about 15%, and I said "Nahhh" and decided to wait for it to calm down. That was when it was at, uh, $9. Ouch).
I'm sure this is frustratingly vague.
If you start to pay attention to business -- not in the sense of reading the WSJ, but just looking at how consumers behave -- you'll eventually detect some companies that are either a) able to ask for a higher price than anybody else, or b) able to make acceptable stuff more cheaply than anybody else. About 99% of businesses are second-best or less at one of these things, and those businesses are fundamentally unable to grow without investing equivalent capital. The other 1% can usually have above-average growth without having to reinvest all of their earnings, or have steady earnings that are high compared to invested capital but that can't be easily grown. An example of the former would be a software company or a drug company -- it costs a lot to create a product, but the cost of selling it to a million people is not that much more than the cost of selling it to ten thousand. An example of the latter would be the gravel and sand business -- nobody is going to import ten tons of the stuff from overseas, or even across state lines, so it's basically a business made of hundreds of tiny local monopolies. Some of these are exceedingly well-managed; they pay dividends when their stock is high, and buy it back when their stock is low.
Basically, your goal should be to have a portfolio you don't have to follow, of companies that will tend to grow their earnings faster than their capital and thus throw off free cash for shareholders. If you can get these at a fair price, your net worth should grow nicely.
However, this is difficult to articulate and extremely hard advice to follow. Perhaps it would be better to put most of your money in an index fund, and do this with the rest of your money long enough to see if it works for you. Sadly, this kind of strategy should be judged over a longer time period (like five years). So, index fund or take your chances.