Swearing Off Market Volatility

According to a recent research report on allocation, Merrill remains overweight in consumer staples because they perform well in decelerating profit cycles and are seen as the most undervalued sector in the brokerage's dividend discount model. While the report recommended reducing positions in financial services, industrial stocks and materials, with an eye to a flattening yield curve, it also suggested increasing holdings in defensive sectors such as health care, utilities and energy. Merrill pulled back from technology and consumer discretionary stocks, calling tech "a bubble sector."

"As we have repeatedly emphasized, even the biggest of bulls are forecasting that the profits cycle will decelerate in 2004," the report said. "We have gradually shifted our sector weights to better reflect a late-cycle environment (i.e., moving sectors such as energy and materials upward in our sector ranks), but now feel that it may be more appropriate to make our recommendations even more conservative."

That's music to the ears of Mitchell Freedman, a financial planner in Sherman Oaks, Calif., who counts many members of the entertainment industry among his clients. He tells them to look for value, make an investment plan and stick with it.

Most individual investors need to see results before investing. That often leaves them behind the maximum upside and prone to sell near the maximum downside, Blood says.

After all, the strong performance of the major indices in 2003 swept many investors back into the stock market. The Dow Jones Industrial Average rose more than 28%, the S&P 500 had a total return of 26.38% and the Nasdaq Composite gained 48.8%.

"I think the financial services industry thrives on people buying and selling; they don't make money by people sitting and holding tight," Freedman said. "Since they make their money on transactions, it's no wonder that they do encourage people to try to pick the times to buy and the times to sell. I think applying one method over a long period of time will produce reasonable gains, provided the methodologies aren't faulty in and of themselves."