401K Strategy

[gekkoplus]

I get paid every two weeks and that is when my contribution goes into 401K. I have observed that most of the times market bounces temporarily just before my contribution goes into 401K and then dips again. I do not have any control over delaying or hastening my contributions in any way.

My strategy is to assign the incoming stream of funds to the bonds. Then as market dips that week, move money from bonds into the mutual funds as usual. Of course this will need some active surveillance over market on my part but I think small gains like these could make a substantial difference in the end.

What do you guys think?

PS: I wish my contributions go into my 401K today as market has been down since consecutive days. My payday is tomorrow so my contributions will be coming in end of day tomorrow. I am sure I will see market bouncing by end of day tomorrow.

[jIM_Ohio]

why bother?
what you are seeing is the current market going down (has nothing to do with 401k deposit timing, the moon, or the price of corn in woodstock).

No reason to time, in 30 years (when you access the money) the timing of the purchases will not matter.

[kork13]

My recommended strategy: Don't worry about it.

You're putting money into the 401k for the VERY long term, so the difference in contributing today or tomorrow is largely meaningless. I believe it was Jim who previously made the same argument... If you're following DCA, today or tomorrow (and whatever 'bounces' you're seeing) really won't influence your balance too much come withdrawal time...

[kork13]

lol okay, Jim, you beat me to it. snuck your post in as I was typing... haha

[Broken Arrow]

I get paid every two weeks and that is when my contribution goes into 401K. I have observed that most of the times market bounces temporarily just before my contribution goes into 401K and then dips again.

Hmm?! It could be just a huge coincidence, because I'm pretty certain the market doesn't work like that.

what you are seeing is the current market going down (has nothing to do with 401k deposit timing, the moon, or the price of corn in woodstock).

Great. Now what am I suppose to do with this corn prediction gizmo that "Bubba" sold me from the trunk of his car?

[bjl584]

I wouldn't even bother as others have stated.

However, if you are able to time the market that well, then forget the 401K. Write a book, get a tv show, and become the richest man on earth. But, before you do that, let me in on your secret.

[simpletron]

I thought about my contributions going 100% to the money market and then over the course of the next two weeks shift all that money back into stocks as a way to improve my return, but quickly came to the conclusion it wasn't worth the work.
1. you are not always going to get it right(impossible to time the bottom)
2. most of time, mutual funds don't make huge moves over a two week period. (not much of a impact if you could get it right)
3. I don't want to hover over my 401K everyday, worrying if I can save a few dollars and then regretting when I mess up the timing.

who is to say the market will be up on friday, it is quite possible it continues the trend and falls some more. here a question for you and be brutally honest, over the past two weeks, would you have picked the right day? which would have been either the friday you contributed or the following monday

[jIM_Ohio]

Another point- the OP was mentioning the market, but not his mutual funds he invests in... it could be the manager sits on the cash for 2 months anyway and times the move at managers discretion.

If the OP really was obsessed about this, consider putting 75% of contributions to mutual funds (which are in the market) and 25% to a money market fund, then timing the 25%.

[gekkoplus]

1. you are not always going to get it right(impossible to time the bottom)
2. most of time, mutual funds don't make huge moves over a two week period. (not much of a impact if you could get it right)
3. I don't want to hover over my 401K everyday, worrying if I can save a few dollars and then regretting when I mess up the timing.

1. I don't have to always get it right. I do not expect this to always get right. What I am saying is I get 24 chances to time the market every year (biweekly pay). Even if I time it right half the time, that is still 12 chances that go right.

2. I am talking here about moves as small as 1% change. If I am able to correctly time half of my chances with a 1% tick every time, that is still 10-12% above the market at the end. (24 opportunities, 12 gone right, 1% gain above the market at each opportunity). Also there is a minimal downside potential in comparison with the market with such timing.

3. I log into yahoo finance everyday anyway. I do not have to "research" the market, I just need to check change on a couple of indexes. I do that everyday anyway. And all my mutual funds are index funds right now.

[jIM_Ohio]

1. I don't have to always get it right. I do not expect this to always get right. What I am saying is I get 24 chances to time the market every year (biweekly pay). Even if I time it right half the time, that is still 12 chances that go right.

2. I am talking here about moves as small as 1% change. If I am able to correctly time half of my chances with a 1% tick every time, that is still 10-12% above the market at the end. (24 opportunities, 12 gone right, 1% gain above the market at each opportunity). Also there is a minimal downside potential in comparison with the market with such timing.

3. I log into yahoo finance everyday anyway. I do not have to "research" the market, I just need to check change on a couple of indexes. I do that everyday anyway. And all my mutual funds are index funds right now.

Three flaws here:

1) bi weekly is getting paid 26X per year not 24X. If you cannot do simple math, such complex timing is a waste of time.

2) yahoo finance delays quotes 15 minutes at least, and mutual funds are only priced once per day anyway. Your index quote will be 15 minutes old and your mutual fund prices are known at end of day and transactions might lag a day. This is like measuring with a micrometer, marking with a grease pencil, then cutting with an axe.

For example if you decide to buy at noon on Monday, that trade MIGHT happen at fund NAV at 4pm (market close) Monday. If you make the trade after around 3pm it's possible the trade does not execute close of business the following day. Meaning you decided at 3pm Monday to get the fund NAV at close of business Tuesday.

3) 26 gains (or 24 gains or 12 gains) of 1% would not mean a 10-12% "instant" return, unless after you got that return you sold the fund. The reason I say that is because if an index is at 100 and your contribution went to cash, then you saw index drop to 98, and you executed a buy, you saved "2%" on the price but did not earn 2% in returns. The fund needs to go up. If 2 weeks later the fund was at 96 and your contribution went to cash, then when index hit 93 you buy, you again saved yourself around 2%, but you do not have a 2% return.

Unless the fund goes up after you buy it, you will not make any money. Timing 1-2% moves will be a fools game because the market moves in 3-10% moves in one day and 1-2 moves happen 10-100X per day.

This might be analagous to sprinkling salt on a birds tail. It's good excercise and a great accomplishment if you can make it happen. But to everyone else around you, you appear to be spinning circles around accomplishing nothing.

A better plan will be this:

Invest 80-20 when the market is off it's high by more than 20%. When market gets to within 10% of it's high go 75-25. When market gets to its previous high go 70-30. Each time market goes up 10% add 5 or 10% to bonds and cash. When you hit 40-60 make sure all new contributions go to cash. When market drops 20% go back to 80-20. If it drops another 20% go 90-10 and if it drops another 20% then go 100-0.

80-20, 75-25, 70-30, 40-60 are %stocks-%bonds/cash from an asset allocation point of view (if you did not know).

It will be MUCH easier to track the macro movements of the market and incorporate into an allocation you control than to time the micro movements of an individual contribution and have little control over allocation.

History has shown allocation impacts performance more than contribution timing.

[Like2Plan]

What do you guys think?

I think
1. It is too hard to time the market.
2. Your 401K may have restictions on the number of moves you can make per calendar month.

[srblanco7]

I think that unless you can show hard data to prove your observation, you're likely wrong.

I think that if you're watching the market everyday, monitoring the buy point of 401k contributions, that you need to find a hobby.

[Snave]

[QUOTE=gekkoplus;201810]1. I don't have to always get it right. I do not expect this to always get right. What I am saying is I get 24 chances to time the market every year (biweekly pay). Even if I time it right half the time, that is still 12 chances that go right.QUOTE]

I am confused by this logic. You have a 50-50 shot without trying to time it. Either it is going up or going down when your funds go in. For arguements sake, we will not entertain it staying flat. By the way, the best fund manager's in the world couldn't really time the market if you hadn't noticed. I don't think you will have much luck either. The only thing thing this is going to do is make you more frustrated.