The key is dividends, dividends, dividends, as you might expect, but proper diversification also plays a major role, writes MoneyShow.com editor-at-large Howard R. Gold.

So, you’re worried about the market. Who isn’t?

The relief rally that pushed the S&P 500 index back above 1,200 ended abruptly Wednesday, after the Federal Reserve said it would purchase $400 billion of longer-dated Treasuries to “put downward pressure on longer-term interest rates.”

Global markets sold off big time as the Fed’s downbeat statement cited continued economic weakness. But the debt crisis in Europe and here will make it difficult for governments to take steps to stimulate their economies.

  • Who's most responsible for the US debt crisis? Read Howard’s view and cast your vote on The Independent Agenda.

Also, as the third quarter comes to an end, analysts and strategists are ratcheting down their earnings forecasts and price targets for the S&P. Meanwhile, prophecies of gloom and doom are everywhere. I know—I’ve made a few of them myself.

But that shouldn’t stop you from investing completely. None of us really knows where the market is going, so drastic moves to put all our money into stocks or pull all of it out at any one time usually don’t work.

So, what should you do now? Basically, I think you need some exposure to equities, but the key word there is “some.” And which ones you hold matter a lot.

“’Get my risk down’—that’s what people are asking for,” said Richard Band, whose newsletter, Profitable Investing, is aimed at conservative investors.

“People are very afraid,” he told me. “They want the maximum return possible from a low-risk standpoint.”

They’re also shell-shocked. After the dot.com bust, a housing bubble, and the biggest financial crisis and deepest recession since the 1930s, their expectations are definitely lower.

No wonder investors pulled $75 billion out of stock mutual funds in the four months since the end of April, Bloomberg News reported—more than they withdrew in the four months after Lehman Brothers fell.

“Certainly, it’s been a lost decade,” said Band. “Gradually, folks have seen that capital gains were not certain.”

So, instead of chasing the next hot stock, they’re looking for the greater reliability of dividends. “In the last ten or 11 years, more than 100% of your return has come from dividends,” he explained.

In fact, Band said investors should “get as much of your return up front as possible in the form of interest and dividends.” He thinks the bull market is entering its later stages, and investors should move into more defensive sectors, like health care, consumer staples, and utilities.

“First, shift the portfolio to defensive equities,” he told me, and then, “move more of your money into fixed income.”

His biggest concern: aging baby boomers. “I’m worried about a huge flood of people over 65 redeeming mutual funds and selling stocks out of retirement accounts,” he said.

Thousands of people turn 65 every day, and there will be a big jump in that population over the next five years, which Band called “the demographic peak of retirements.”

He’s focusing on large, dividend-paying, multinational, blue-chip stocks. Among his favorites: AT&T (T), Nestle (NSRGY), and PepsiCo (PEP).

Even if AT&T doesn’t get its proposed merger with T-Mobile approved, it would still be a leading telecom and wireless company that has raised dividends for 27 years in a row, “right through the recession,” Band said. He pointed out that its current yield is near 6%, double the yield on 30-year Treasuries and three times that of the S&P 500.

Swiss food giant Nestle trades actively over the counter, he said, and has raised dividends 15 years in a row, with a current yield of 3.8%. The Swiss national bank’s efforts to rein in the Swiss franc will help Nestle’s earnings, he said.

PepsiCo is racking up annual revenue growth of 24% in emerging markets, he said, as it focuses more on snacks and nutritional products. Pepsi has raised dividends 39 years in a row, and its stock yields 3.4%.

NEXT: For Those Who Prefer ETFs…

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For those who prefer exchange traded funds, he recommends a new one: PowerShares S&P 500 Low Volatility Portfolio (SPLV). It takes the 100 least volatile stocks in the S&P 500 over the past 12 months and rebalances every quarter, so it “automatically moves you out of things as they become more volatile.” It’s just a few months old, so it doesn’t have much of a track record.

Jack Ablin, chief investment officer of Harris Private Bank, is “ pretty negative,” he told me. “We raised cash on August 4.”

In fact, cash in the accounts his firm manages is “now 10% across the board. That’s really our maximum,” he said.

“I think the market is currently anticipating a 20% decline in earnings, which is kind of consistent with a normal recession,” he continued…and in that environment it’s safety first. “We’re going to the safest, lowest volatility area of the market.”

Where is that?

“Our preference at the moment is a US focus over international, mega cap over small cap, and growth over value,” he told me. He said the risk in Europe is too high, while emerging markets are facing inflationary pressures.

 “It’s still a market where you’d rather keep some powder dry, “he said. “This bouncing ball in Europe in particular could land in so many different places.”

He also likes investment-grade corporate bonds, which are “OK as long as inflation rates stay relatively low.” One ETF that covers this area is iShares iBoxx Investment Grade Corporate Bond (LQD).

Band also likes investment-grade corporates, but he "wouldn’t touch Treasuries—I think they’re very, very overvalued.”

So do I, though they may have a bit longer to go as the Fed rolls out its program to buy long-dated Treasuries.

I like Ablin’s allocation of 40% equities at this point. I would concentrate my holdings at 30% large US equities, through the kind of stocks Richard Band recommends and a fund of dividend-paying blue chips like Vanguard Dividend Growth (VDIGX) or its ETF equivalent, Vanguard Dividend Appreciation (VIG). (I own the mutual fund.)

I’d also hold 10% in emerging-market equities, while avoiding Europe or Japan, where you get little bang for the extra buck of risk. I wouldn’t buy emerging markets just yet, but would build my position as they sell off more, as I suspect they will.

I would put 40% in bonds, like the LQD ETF Ablin recommends, as well as a mixture of high-yield bonds and Treasury inflation protected securities. 10% more would go into cash, and the remaining 10% in gold and dollar hedges.

I do expect the dollar’s quiet rally to continue, and I wouldn’t be surprised to see gold fall into the $1,600-an-ounce territory, but that might be a good buying opportunity. (I own the SPDR Gold Shares ETF and an ETF focused on the Australian dollar.)

You can’t outguess the markets—especially these days—but if you’re in solid, dividend-paying stocks and have real diversification, that’s the best you can do in a volatile, uncertain world.

Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. You can follow him on Twitter @howardrgold, read more of his commentary at www.howardrgold.com, and check out his political blog www.independentagenda.com.