If you are riding out the downturn there's little need for diversification. Sure don't keep your portfolio in a single stock but the S&P500 is sufficient diversification. You don't need cash likes or bonds. Equities have the highest rates of return and that's what you should be having.
it really depends on your risk appetite. the conservative investor will want downside protection against rare market collapses that last for decades (e.g., 1929).
investors typically get more conservative as they get older, so your advice might be ok for most 25 year olds, but not for most 65 year olds. the conventional wisdom then is to hold increasing proportions of weakly/negatively correlated securities like bonds in your portfolio as you get older, particularly through downturns.
and the s&p500 is a reasonable basket of equities, but it's not perfectly representative of the asset class either, since it's composed of primarily large cap domestic stocks. it doesn't include any startup equities, for instance.
