Market timers often jump out of the stock market when they think it is going down in the hopes of getting back in at lower prices. For this to work, the investor has to get out early enough and back in early enough to avoid selling low and buying high.
This brings us to the idea of a “market timer breakeven date.” The following picture illustrates what I mean.
Let’s assume for the moment that stocks are now on the rise. A market timer getting back into the market today would have to have sold out of the market before the breakeven date shown in the picture to come out ahead. Any given day we can draw a line over to see the new breakeven date. As stocks rise, the breakeven date moves further into the past sweeping by the exit dates of investors who haven’t jumped back in yet making them losers in the market timing game.
Of course, the stock market doesn’t move in a nice smooth curve like the one shown. It jumps up and down mostly unpredictably. Looking at the chart of the TSX, the most reasonable breakeven date corresponding to today’s closing TSX index level is Oct. 24, 2008.
So, if you jumped out later than this date and haven’t jumped back in yet, odds are that if stocks continue to rise, you’ve lost the market timing game. I’m hoping that the economy continues to improve, stocks keep rising, and the breakeven date keeps moving further into the past.