We can't help ourselves, us retail investors.

Without fail, we get over-cautious when the market is going down and over-exuberant when it's going up. In other words, we overreact in both directions.

When Lehman Brothers collapsed in September last year, investors panicked and the S&P/ASX 200 dropped 38 per cent over the next seven months. The financial world would never be the same again.

But in March, in the absence of any particularly bad news, came a dramatic turnaround. Investors piled back in – this time for fear of missing out – and the market rallied 55 per cent over the subsequent seven months. Hooray the crisis is over. Or is it?

The sharemarket jitters of the past week suggest not. Spooked by the increased prospect of rate rises and unexpectedly soft US housing data, investors recalled the recent carnage and deserted equities. Four days of falls until Friday saw the market give up 6 per cent, all of October's gains.

The $64,000(-plus) question is what now?

Market analysts increasingly talk about the possibility that after a retraction (and this could be the beginning of it) we could see several years of subdued market returns.

This is not the "V"- or "W"-shaped recovery but more of a square-root shape.

If that's the case then, just how should you position your portfolio? Technology stocks (39 per cent return), financials (30 per cent), consumer discretionary (31 per cent) and materials (27 per cent) have led the recovery this year. Meanwhile, defensive stocks such as telecommunications (minus 12 per cent), utilities (minus 4 per cent) and healthcare (minus 1 per cent) have lagged.

So one of the first things investors should ask is whether financials and materials have run too far, too fast.

Research by CommSec shows materials stocks are today valued 98 per cent higher than their five-year average but financials (ex property) are only 22 per cent above. Yet there are plenty suggesting the surge for financials will end – and we've certainly seen that after banking results last week – but big China-driven gains will continue in materials.

In any event, CommSec's analysis reveals latent historic value in sectors such as utilities (trading at a 64 per cent discount), energy (a 53 per cent discount), telecoms (29 per cent) and healthcare (28 per cent). And it suggests even technology (22 per cent discount) and consumer discretionary (20 per cent) are still attractively priced.

So which sectors would do best in a square-root shaped recovery?

Last week Anthony Bolton, long-time manager of one of the most famous and successful fund managers in the world as the long-term head of Fidelity's top-performing Special Situations fund, gave his prediction.

In the shorter term – on the way back up – cyclical sectors such as consumer discretionaries (retail, hotels and restaurants, media) should benefit as people again begin to spend and earnings grow.

But once that phase of the recovery is complete and growth becomes more subdued – which Bolton forecasts for mid-2010 – he advocates a switch to growth stocks such as technology companies.

In theory these shares should at that time be cheap, as it should be cyclicals that have run. He also likes financials.

Where wouldn't he invest? Industrial cyclicals, including construction and building-materials companies.

And commodities.