Tuesday, December 30, 2008

Should You Time The Entries Into Your 401k?

With market action slow over the last week I thought I’d address a question I received about 401k timing and RSI(2). From David recently:

“Could 2 period RSI be used to produce better dollar cost averaging returns in a 401k?Instead of doing 401K contributions on 15th and 30th of every month, what do you think of having the contributions go into a money market account, and waiting for the next RSI<20"

I ran a test from 1/1/98 to sometime last week. If someone placed $100 into their 401k twice a month for the last 11 years the total invested would be $26,400. (I used the 1st day of the month and the 1st trading day after the 14th for simplicity.)

If their returns matched the S&P 500 that $26,400 would now be worth $19,748.34.

If instead of investing the $100 on or about the 1st and 15th, the person decided to enter on pullbacks to where the 2-period RSI was below 20, the $26,400 would now be worth $19,777.66.

In other words 11 years worth of effort would have made them an extra $30.

The issue is they are only making $100 trades the entire time. $30 isn’t great but it isn’t terrible when you’re only trading with $100.

The lesson here is that trying to time the entry of your money into your 401k is a waste of time. If you are going to boost your returns you need to focus on trading the account.

4 comments:

Alex Marion said...

You are better off always contributing to money market, and using a tactical, long term, asset rotation investment plan. Mebane Faber over at worldbeta.blogspot regularly features a multi asset, momentum based strategy that puts you long in the asset classes trading above 200 day MA with the highest 12 month rolling return. The problem with most 401ks though is that you are limited to terrible mutual funds that only cover a few assets.

Michael Collison said...

Thanks for the post Rob. I've found a better way to decide whether to dollar cost average or in cash is to use Lowry's, http://www.lowryresearch.com, intermediate term accumulation/distribution.

They've been doing it for 60+ years and the signals are very timely.

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