As the US population becomes more diverse in the 21st century, researchers face many conceptual and methodological challenges in working with diverse populations. We discuss these issues for racially and ethnically diverse youth, using Spencer's phenomenological variant of ecological systems theory (PVEST) as a guiding framework. We present a brief historical background and discuss recurring conceptual flaws in research on diverse youth, presenting PVEST as a corrective to these flaws. We highlight the interaction of race, culture, socioeconomic status, and various contexts of development with identity formation and other salient developmental processes. Challenges in research design and interpretation of data are also covered with regard to both assessment of contexts and developmental processes. We draw upon examples from neighborhood assessments, ethnic identity development, and attachment research to illustrate conceptual and methodological challenges, and we discuss strategies to address these challenges. The policy implications of our analysis are also considered.