Even as the economy and the markets are recovering, many clients are sitting on cash and feeling pessimistic about stocks. Few realize that investors with diversified portfolios who rode out the crash actually owned slightly bigger portfolios at the end of 2010 than they had at the peak of the market in 2007.

"Don't get me wrong, all is not rosy, but the reality is certainly different than the perception of total damage done to portfolios," says Natalie Miller, consulting director of private client services at Russell Investments. "Our human nature is to focus on bad news."

Early last year, Russell began offering a chart to financial planners that showed the effect of holding stocks and bonds through the downturn; a chart that planners found helped calm anxious clients. "People were thinking their portfolios were down 50% when they weren't," Miller says.

Diversification worked. Take a client who had $100,000 at the market peak in September 2007 in a balanced portfolio, represented by indexes, which included 35% in U.S. stocks, 17% in developed markets, 3% in emerging markets, 5% in real estate investment trusts and 40% in U.S. bonds. If the client didn't sell-but stopped investing-from the peak through the end of 2010, his or her portfolio would have managed a slight gain, at $102,926. If the client had continued with a regular investment plan and added $300 a month to the 60/40 portfolio during the time period, his or her holdings would have grown to $116,639.

An all-stock portfolio also wasn't the disaster many people think. A $100,000 investment in the Russell 3000, which is made up entirely of U.S. stocks, would have ended last year down 9%, at $90,935. That news is a positive surprise for many.

What happened to investors who panicked in September 2008, around the time Lehman Brothers went bankrupt? If your client with the diversified portfolio put all the money into cash, it would have been worth $86,140 at the end of last year, compared to $102,926 for simply hanging tight.

In a perfect world, your client would have sold at the market peak and reentered around March 2009 as the market began to climb. Perfect market timers would have ended last year with $160,784-just ask any timer you meet how they did.