Swearing Off Market Volatility

Updated from 7:04 a.m. EST

The stock market's big up-and-down swings of late might have daytraders and professional investors buzzing. For the majority of investors, however, the recent gyrations should be viewed simply as noise, with little bearing on a longer-term allocation strategy.

Consider a recent period, in which the Dow Jones Industrial Average rose or fell by more than 80 points five times in eight sessions, just to end up about 30 points higher than where it started. Professional traders love this kind of market because it plays into strategies that profit from volatility itself.

The average investor should pay far less attention, financial advisers say. Neither the market correction, which took the Nasdaq Composite, the S&P 500, Dow Industrials and most other indices down for the year, nor the recent rally should profoundly alter your asset-allocation strategy. It's far wiser to stay steady and follow the consensus of market strategists, who may quibble about sectors but generally agree that the right mix of stocks, bonds and cash depends much more on an investor's age than what the market is doing at the moment.

Even for pros, the cross currents are hard to gauge. On one hand, Thursday's snapback could mark the beginning of a market bottom. On the other hand, bullish sentiment was dropping in a recent, influential survey. (Never mind that a drop in bullishness is good for the market, say contrarian pros.)

Now may be a good time to buy on dips, according to Charles Blood, global market strategist at Brown Brothers Harriman. The investment bank is currently about 70% invested in equities, 25% in bonds and about 5% in cash, he said.

But remember, conventional wisdom suggests that investors roughly split a portfolio into 60% equities and 40% fixed-income investments. Blood said there will be a pullback from his firm's high equity weighting, but said it won't be a sudden, drastic shift.

"I have been thinking that as stocks move higher, it would be time to at least bring equity numbers down to a more standard level," he said. "The recent dip was a buyable dip, but recent big returns are behind us. We don't want to get swept up in the notion that we can do as well as we have done."

The wisdom of a well-allocated portfolio was amply demonstrated recently when bond prices rallied on questions about the strength of the economic recovery, with yields on the 10-year note returning to levels not seen since last July.

The weekly Wall Street survey by Chartcraft.com bolstered Blood's outlook: Its Investors Intelligence report for the week ending March 19 showed a 13% drop in respondents who called themselves bulls, mirrored by a rise in the number expecting a market correction.

Even without a major correction, Blood's view that the biggest gains of the market are behind us has support from Merrill Lynch, which is in the process of revising its sector weightings and starting to make some defensive moves.