[yummyfajitas]

So if Grandma had 100K in her diversified portfolio of low-risk investments and the market exploded 50%, she'd have 50K, which represents a major loss of financial capabilities.

This is most likely not the case. There are many ways the market can "explode 50%". One way is for each security to take a 50% haircut. Another is for the high risk securities to take a 100% haircut and the low risk to take a 0% haircut. Obviously real life lies somewhere in between.

However, it's not by any means obvious that the low risk, well diversified investors would take a particularly large haircut in a market crash. This is particularly true if they don't cash out immediately after the crash.