11/19/2013 07:08 pm ET Updated Jan 25, 2014

The Phony Market Correction "Debate"

Paul Taylor via Getty Images

The jockeying for position to be the next investment guru with uncanny predictive powers has intensified. On one side are those who believe the market is "overbought." Proponents of this view point to various "signs," including "suspicions that investors are becoming too complacent" and "questions about valuations."

On the other side are those who tell investors that stocks "are the only place to be." These "pros" cite improving economic activity and earnings growth.

There are credible advocates for both positions. Federal Reserve chairman nominee Janet Yellen does not see current stock prices as evidence of a "bubble." David Stockman, budget director under President Ronald Reagan and author of The Great Deformation, sees bubbles "everywhere."

The debate is sometimes infused with dramatic positions, like the one espoused by Kerry Balenthiran, author of The 17.6 Year Stock Market Cycle. In a March 14 article, he told CNBC that a long-term bear market is around the corner and will last until 2018. He predicted a loss of up to 30 percent for the Dow. According to Yahoo Finance, the Dow Jones Industrial Average closed at 14,539 on March 14. It closed at 15,961 on November 15. Maybe the "corner" was further away than Mr. Balenthiran contemplated.

Beleaguered investors are squeezed in the middle, confused and befuddled as usual.

An article in Forbes provided some historical perspective on market corrections. The current bull market has run for approximately 4.5 years. An analysis of the S&P 500 index since 1932 found the average bull market duration was 3.8 years. Only five of the 16 bull markets prior to this one lasted more than 4.5 years.

A bear market is defined by Investopedia as a downturn of 20 percent or more in multiple broad market indexes over at least a two-month period. According to an analysis by First Majestic Silver Corp., there have been 25 bear markets since 1929. Bear market losses ranged from -21 percent to -62 percent, with an average loss of -35 percent. The average bear market lasted 10 months.

There is no legitimate debate about whether a bear market will occur. History tells us it is inevitable. As an investor, you have choices about how to deal with market corrections. You can listen to pundits who pretend to have a predictive expertise that does not exist, and bounce in and out of the markets based on their musings. This conduct, which is encouraged by much of the financial media, will enrich your broker by generating fees, and most likely reduce your expected returns, by increasing costs. If your timing is off, it may also cause you to fall short of market returns. This is not a responsible or an intelligent way to invest.

You could reject this approach. Ignore the financial media. Assume the predictions of market pundits are no better than what you could expect from random chance. Understand the history of the markets and assume that markets work in cycles, going from bull markets to bear markets. Adjust your asset allocation to mitigate volatility. Ensure that the bond portion of your holdings is in high-quality, short- or intermediate-term bonds, like Treasury bills or mutual funds like the Vanguard Total Bond Market Index Fund (VBMFX). The majority (66 percent) of the bonds in this fund are issued by the U.S. government. Its bond holdings have an average maturity of 7.4 years. When (not if) the bear market hits, your bond holdings will permit you to weather the storm.

Don't be a victim of the hysteria, fear and anxiety generated by your broker and the financial media. The entire debate over the timing of a market correction is bogus.

Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, The Smartest Sales Book You'll Ever Read, will be published March 3, 2014.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.