Macey compares the struggle to maintain the European Union to America's Civil War. "The U.S. almost was split," he says. He says the German government will ultimately recognize that it should for its own self-interest foot the bill to subsidize Greece and other weak EU economies.

He says the stronger European countries have no choice but to fund a solution because cross-holdings among large European banks that have invested in each other's deals would cause a cascade of failures. "Ultimately, whatever needs to be done, will be. But it will be a period of angst because no one will step up until the last minute."

"You don't need to make sure everyone who owns Greek debt gets paid off," says Macey. "But you need to make sure the big European banks do not fail. If you let banks fail, you won't have an economic system anymore."

Macey says stock markets have overrated the likelihood of such a calamity. While disaster is a potential outcome, the stock market has priced it as though it is the most likely outcome when it is only a possibility.

He says advisors must address the panic selling and the investor flight with one of two answers for their clients: The clients need to stay in the stock market as a long-term strategic plan or should withdraw temporarily while at the same time defining an explicit re-entry point.

"If you are going to get out, you need a discipline for getting back in," Macey says. "We've introduced a dynamic allocation in which, as the stock market goes down, an investor decreases exposure. And when it goes up, you get back in." By defining a re-entry point, you satisfy the client's need to protect himself from the downside, but the client agrees to a re-entry point in an effort to avoid missing out on a major rally."

Tony Davidow, a member of the board of directors of the Investment Management Consultant's Association (IMCA) and a managing director and portfolio strategist at Rydex/SGI, says markets are more vulnerable than ever to swings like the one in mid-August. With markets around the world so interconnected and the flow of information so readily available to investors, Davidow says markets are more prone to volatility in response to dramatic events like the U.S. credit downgrade.

Davidow, a 25-year veteran of the financial services business, recalls his experience as an analyst working on the floor of the American Stock Exchange during the stock market crash in October 1987. "One of the older gentleman working on the floor said to me, 'You're lucky, you're getting your crash out of the way,' because he thought a [market crash] was a once-in-a-lifetime event." Since then, Davidow points out, the market has taken steep falls in 1994, 1998, 2000, 2008 and again in recent weeks.

Davidow says Rydex, like other fund companies, saw investors dumping stocks in the mid-August selling frenzy. "Individual investors have a history of doing the wrong thing at the wrong time," he says. "If history is any indication, they will return to the market after it has already enjoyed a good run-up. By the time they re-enter the market, they will have lost out on gains."

In times like these, Davidow says, some advisors question whether modern portfolio theory is dead and if traditional notions about asset allocation and diversification still work. While he concedes no one can know, he says, "The market looks good from here. The U.S. is the best house in a bad neighborhood."