Feb. 1--There is a sense of betrayal among investors who have been conscientious.

And when they talk about it, they sound like individuals who find themselves with a fatal disease after a lifetime of healthy living -- eating a well-balanced diet, exercising and staying away from cigarettes.

"I thought I was doing everything right," a lawyer told me recently about his 401(k). "I didn't swing for the fences. I did what I was told. I diversified, and now look."

He hadn't picked a couple of hot stocks or relied on one stock mutual fund. He had assembled a combination of stock mutual funds and a bond mutual fund with the idea that if the stock market was ever brutalized, his numerous selections would buffer the impact.

Then came last year. The stock market crashed, and he lost about a third of his savings.

Now he's not sure if he can count on diversification to save him from ruin. His questions are being asked within investment circles too.

"The cry has gone up from institutional investors around the world: "What the hell went wrong with my portfolio? I thought I was diversified," noted Ben Inker, chief investment officer for GMO, a money management firm.

Diversification did work to a degree to keep losses down -- it just didn't offer as much protection as investors imagined, because the market collapse was so extreme.

An individual who had adopted a classic diversified portfolio, which put 40 percent in bonds and cash, and the rest in various stock indexes, would have lost 23 percent of their money last year, noted Michele Gambera, an Ibbotson Associates economist. That sounds terrible, but it's quite a bit better than the 35-40 percent losses suffered by people 100 percent invested in stocks.

"I think people got carried away with diversification," said Brett Rentmeester, director of Altair Advisers in Chicago. They tried private-equity investments, hedge funds, commodities, real estate or real estate investment trusts, and stock funds that sliced and diced stocks into various types -- those from foreign countries, those from the U.S., those that selected large companies or small companies, and those that picked the fast growers and the slower growers, or what are called "value" stocks.

In the end, they were all overvalued and went down hard. The declines were similar, defying the averages that show up in academic research on diversification.