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Even if you don't own any stock in a bankrupt company, your portfolio is still at risk.

Regulators recently let CIT Group (CIT - $0.26) fall into bankruptcy.  When a large company goes bankrupt creditors (bond holders, lenders and vendors) can usually get part of their money back, stock holders are nearly always completely wiped out.

Last year Bear Stearns avoided bankruptcy by selling to JPMorgan (JPM - $42.58).  Shareholders were basically wiped out.  A slow panic ensued and prices of all financial institutions began to fall.  Fund managers and traders were selling all banks and broker stocks.  Investors realized they didn't know how to analyze the complex structures of financial institutions anymore.

How would a long term investor who doesn't have the time or interest in trading adjust a portfolio?    Any bankruptcy creates winners and losers.  The losers are the shareholders and employees (sadly) of companies that took much risk (gambled and lost); the winners are the the survivors who pick up customers and brands lost by the bankrupt company.

What would I do?  Sell individual bank shares and buy a fund that holds a large and diverse group of banks.  This diversification protects against a debilitating loss from an individual bank failure (it will hurt but won't kill).  However, when the winners and losers are sorted out you'll own a portfolio dominated by the stongest and most profitable banks.

In the face of the CIT bankruptcy, one company at the risk of another investor panic is Citigroup (C - $3.98).  Citigroup is a terrific institution with great banking franchises and brand recognition all over the world.  However, they made some bad decisions and made a lot of risky loans that are either not paying or are in danger of not paying.  I think Citigroup will survive but not after another potential panic on it's shares.  I've been selling my Citigroup shares and am planning on putting the money into an ETF that focuses on the financial sector - my choice, the Financial Select Spider (XLF - $14.17).