Facebook's IPO is set to unleash a slew of new millionaires on the Bay Area. Granted, it won\u2019t all happen at once. Most employees have to wait six months before cashing in their restricted stock units. But this is a good opportunity to highlight the dangers of technology IPOs. Simply put, they create instant wealth, often concentrated in a single position.\r\n\r\nThere are always some employees who know how to properly diversify, but most aren\u2019t investment professionals. They typically invest in what they know, and what they know is technology. So even if the payout is predominately cash, as in Facebook\u2019s case, a number of employees will still end up with technology-heavy stock portfolios. This is a dangerous game. Stock concentration can significantly increase portfolio risk, so whatever the situation, diversifying usually makes sense.\r\nThe Typical IPO Gamble\r\nIn a more typical situation, your company goes public, you exercise options, and the vast majority of your portfolio ends up in a single stock. What next? Holding the concentrated position is a big gamble. You may get lucky, but in reality the odds are against you. A\u00a0study published in the\u00a0Journal of Finance\u00a0by Jay Ritter, Professor of Finance at the\u00a0University of Florida, examined the performance of over 7,400 stocks following their IPOs from 1980 to 2009. While short-term performance was positive, longer-term performance was less than ideal. After three years, post-IPO stocks underperformed broader index firms by almost 20 percent. Granted, this number was pressured by company shutdowns during the tech boom and bust. But it still mirrors the trend in prior years.\u00a0\r\n\r\nSo if chances are low you\u2019re sitting on the next Google, what do you do? Diversify. Why plow your entire net worth, everything you\u2019ve worked for, into a single bet? A bet with low odds, nonetheless. You\u2019re already 100 percent dependent on this company for income. Why would you put your investment portfolio at risk too? Don\u2019t get greedy. Diversification is the best way to reduce portfolio risk and secure your financial future.\r\nWhat Does Diversification Actually Mean?\r\nDiversification doesn\u2019t mean spreading your wealth across a few different technology stocks. You should build a portfolio of multiple lowly or uncorrelated investments. A properly diversified stock portfolio should have exposure to all economic sectors, not just technology. The reason is simple: stocks in the same sector tend to behave more similarly to each other than to stocks in other sectors. So if technology blows up, your exposure to energy, health care, or utilities is there to act as a counterweight. Think about it. If you were entirely invested in technology in 1999, or financials in 2006, you would have lost over 80 percent of your portfolio value in the subsequent downturns. And this is despite having a fairly well-diversified portfolio of stocks within those respective sectors. Sector concentration can be just as risky as stock concentration.\r\n\r\nAnd diversification shouldn\u2019t stop there. You should aim for exposure across different styles, sizes, regions, and to the extent possible, sub-industries. Spread out your risk. Doing this reduces portfolio volatility and can actuallyimprove\u00a0expected return. Greater return with less risk is the Holy Grail of investing. Ideally, each stock should only represent a small percentage of the aggregate portfolio. When positions get much greater than 5 to 7 percent, a portfolio begins to take on meaningful concentration risk.\r\n\r\nBut always keep in mind equities are just one component of building an investment portfolio. Studies show the most important driver of long-term returns is asset allocation. In other words, the percentage of your portfolio invested in higher level categories like stocks, bonds, alternatives, and cash. Unfortunately there\u2019s no one-size-fits-all allocation. It depends entirely on your personal financial situation \u2014\u00a0your\u00a0goals,\u00a0your\u00a0risk tolerance, and\u00a0your\u00a0assets. It\u2019s probably the most important investment decision you\u2019ll make, so consult a professional if you don\u2019t feel up to the task.\r\nLooking Ahead\r\nOf course, congratulations are in order for all you Facebookers. Going public is a significant achievement and major milestone for any company. Be proud. Just make sure you\u2019re ready when those RSU cash payments come your way. Have a plan in place, and make sure your investment portfolio is well-diversified. Don\u2019t let something like stock concentration, or even sector concentration, ruin your newfound fortune.\r\n\r\nThis article\u00a0first appeared on Forbes. Image via Forbes.