Financial journalists will undoubtedly be scribbling energetically in the coming weeks to offer anxious investors an explanation for "what it all means." A sample appears in the most recent issue of Forbes, where three prominent investment professionals offer their views of the future: one is quite bullish, one is quite bearish, and the third is cautious but hopeful. Each offers compelling evidence to make their case. Forbes editors helpfully place each column on consecutive pages, making it easy for readers to determine which pundit is promoting views most similar to their own. The only investors likely to improve their portfolio results by reading such observations are those who were not properly diversified to begin with and become motivated to take action. The world is an uncertain place, and sharp fluctuations in asset prices reflect that uncertainty.

History offers abundant evidence that market economies are resilient. The world will find a way to manage its financial affairs without the advice of Lehman Brothers, and the residential mortgage loan will survive even if Fannie Mae does not. The key issue for investors is to make sure their financial future does not get derailed by events at a handful of firms, and that their portfolios are properly positioned to capture all the rewards the markets have to offer when the next upcycle begins. Recent events have provided an unusually harsh lesson of the importance of diversification. In a matter of days, shareholders of three financial giants "Fannie Mae, Freddie Mac, and Lehman Brothers Holdings" have seen their shares plunge into the penny-stock category. A fourth, American International Group, is scrambling for survival. For well-diversified investors, the financial damage associated with these four firms has been minor; in aggregate, they represented less than 1% of a diversified US equity portfolio on May 31, 2008, and even less for a global strategy. Four or five years from now, these investors may have a difficult time remembering what happened and when.

However, for those with concentrated positions, especially employees with large holdings of company stock, these events are a financial tornado inflicting potentially irreparable damage. One business owner cited by the Wall Street Journal recently purchased 25,000 shares of Freddie Mac at roughly $5 and lost most of his investment in a matter of days. Ironically, he claimed to be through with day-trading strategies, and was seeking a profitable long-term investment. Elsewhere, the Wall Street Journal estimated that the 24,000 employees of Lehman Brothers have seen $10 billion in personal wealth evaporate as the value of Lehman shares collapsed. Many long-time employees of Fannie Mae or Freddie Mac have experienced similarly catastrophic losses. When times are good, the risk of a concentrated portfolio often appears extremely remote. As we pointed out in this column in March 2006, Fannie Mae was once characterized by Money magazine as "America's Safest Stock," with a bulletproof business model that was "as close as you'll get to an invincible earnings machine."