I Will Not Time the Market. I Will Not Time the Market

(MoneyWatch)  When people in the advice business make the point that timing the market is a loser's game, they often trot their favorite hypothetical. You've not doubt encountered it in the "Investing is Easy" brochures that your company gave you when you enrolled in your 401(k). (That is, if you even read them, which you didn't.) Rookie financial planners can recite this example like kids in a Taliban Madrassas can recite their Koran. And while the exact numbers vary, it always goes something like this: "If you had bought and held stocks over the past, say, 20 years, you'd have earned an average of 8.4 percent. If you had missed just the 40 best days in that period, you'd have actually lost money."

To state the obvious, the example is more than a little tortured. What are the odds any one would actually miss the 40 best days over 20 years? And no other days? Essentially zero, of course.

Of course, you aren't supposed to take the example quite literally. And if you don't, the overarching point is likely to make you a little nervous at the midway point of 2009, especially if you sat out the past three months. And that point is, the stock market may have grown eight percent a year, on average, over the past century, but that eight percent came not in steady annual increments like raises for bureaucrats, but rather in neck-snapping fits and starts. If you mistimed the market and happened to be in cash when those sudden starts occurred, you put a serious crimp in your returns.

And that concern is coming home to roost right at the moment. A lot of people have just missed the best market rally since 1938. There is, for starters, $3.7 trillion sitting on the sidelines in money market funds, twice as much as could be found in those safe havens in 2006. The average stock mutual fund still is losing more to redemptions than it's taking in from new sales. (Except in emerging markets funds, which is a whole different story!)

If you're one of those who sat out the spring rally, you're in good company. Any number of shudda-known-better investors have confessed that they're on the sideline even now. People like the great Jeremy Grantham, who confessed at the Morningstar conference he couldn't put his own money into the market. People like MoneyWatch.com's own Jill Schlesinger, who fessed up in her blog. And me, who is doing the same right now.

If you're on the sideslines now, having missed a 40 percent market move, what do you do? I'd recommend Grantham's advice which he calls "Plan B."

Admit that you missed the rally, suck it up and dollar cost average in a little at a time until 2011. Do it automatically and don't look at whether you're doing well or badly. Just get back into the market, admitting that you don't know what will happen from here, which psychologically lets you off the hook if you're wrong.

Or you could sit on the sidelines, hoping for the market to fall -- so you so you can jump back in at a price lower than today's. Grantham calls this "regret minimization." It's equivalent to saying you'll beat your bad timing this time by timing better in the future if only you could get another chance. But seriously now. If the market stumbled again, would you really jump back in?