Contributing to plans during intra month lows

[accountingsucks]

Hi all

I know that attempting to time the market is foolsplay. Like many here I diligently contribute every month to my retirement accounts in the hopes of getting FIRE'd ASAP (sigh 20 years to go). I normally do my contribution around the middle of the month, but do not have any rhyme or reason as to the timing. I also do not have it automatically set up as it's not possible with how my account is setup.

Anyways, my portfolio is strongly correlated with how the Toronto Stock Exchange works as it's mainly EFT's and dividend funds. There are about 20 trading days each month and over the long term we would expect that 11 of those would be up days and 9 would be down days (or something close to that). My plan is to only invest whenever there is a blip in the market. For instance in the last 2 weeks, I think there were 3 days out of the 10 that had the TSX drop. More specifcally I would want to invest in the current month between the 5th and 20th day of each month. Whenever the market has a down day, I would invest in the following day - no exceptions. If the market had only up days, then I would go ahead and contribute as usual on the 20th of the month to ensure I made my contribution for that month.

Any thoughts on this? For example, the last 10 days on the TSX had 7 up days and 3 down. The down days were in the .3-.5% range. If you could get even a .2% "discount" every month it would be significant over the years I would think.

Is this a ridiculous idea?

 

[al_bundy]

i read somewhere that most months the US indexes go up toward the end of the month and drop at the start or the middle. supposedly the reason is that 401k plans put their money in at the end of the month and wall street uses that to make some trading profits

 

[Meadbh]

I have just started reading a very interesting book called "Behavioural Finance and Wealth Management" by Michael M. Pompian (Wiley, 2006). Here's a quote from Chapter 1:

"Additionally, there is a Turn of the Month Effect. Studies have shown that stocks shown higher returns on the last and on the first four days of the month relative to other days. Frank Russell Company examined returns of the Standard and Poor's (S&P) 500 over a 65-year period and found that US large-cap stocks consistently generate higher returns at the turn of the month (ref 14). Some believe that this effect is due to end of the month cash flows (salaries, mortgages, credit cards, etc). Chris Hensel and William Ziemba found that returns for the turn of the month consistently and significantly exceeded averages during the interval from 1928 through 1993 and "that the total return from the S&P 500 over this period was received mostly during the turn of the month (ref 15). The study implies that investors making regular purchases may benefit by scheduling those purchases prior to the turn of the month."

References:
14. Russell Investment Group website: http://www.russell.com/us/education_center
15. Chris R. Hensel and William T. Ziemba, "Investment Results from Exploiting Turn-of-the-Month Effects," Journal of Portfolio Management (Spring 1996).

So that's probably why my financial advisor has set up my monthly investments for the 15th!

 

[al_bundy]

fortune did a study going back 100 years and found that if you only stay in the market november - april then you would have beat the indexes by 1% or so per year on average. reason is that if you look at stock charts there is usually a 10% or higher correction in the april - october months that usually ends by late october. i don't know what it is about october, but it seems most rallies start late october in most years

 

[Olav23]

I'm also reading "Random Walk down Wall Street" and he makes the argument that if you believe in the efficient market hypothesis that as soon as these phenomena are known, they disappear. There is no free lunch.

But, of course, it is just hypothesis.

 

[al_bundy]

i read about this last year for the first time, checked some charts and looks like it's still true

 

[LOL!]

This is a great idea. I guess in the US, one would put 100% of 401(k) contribution into the stable value or money market, then make the transfer on days of dips. This goes with those studies that say if you miss the top 10, 20, 30, ..., n worst days in the market you do great. You can always tell a worst day before the market close, so you can easily buy near the market close on those worst days.

Of course, you need a plan if a worst day doesn't happen: you must invest that month regardless if a worst day does not materialize. And of course, if you miss the top 10, 20, 30 ..., n best days in the market, you do poorly. And best and worst days seem to happen close in time.

 

[riskadverse]

I believe in market timing, but I have found very little of what is published will work, or is profitable enough to pursue. Before you put any big money on a timing scheme, test it on backdata, which is readily available these days on the internet. It has to work on backdata before you should even consider using your money.

 

[LOL!]

Another study for your perusal as synopsed by Mark Hulbert in the NYTimes.

THE study suggests a strategy for investors who want to exploit the momentum effect. First, they “should focus their efforts on quarter-ending months,” Professor Sias said.

 

[arandomwalk07]

Any thoughts on this? For example, the last 10 days on the TSX had 7 up days and 3 down. The down days were in the .3-.5% range. If you could get even a .2% "discount" every month it would be significant over the years I would think.

Unless I've misunderstood, it has got one obvious flaw - what if the next down day occurred after a series of up days?

Say e.g. you would normally invest on day 1. You wait till a down day to invest and prices go as follows:

Day 1: 100
Day 2: 110
Day 3: 120
Day 4: 130
Day 5: 125

In this scenario you would have been better off investing on day 1.

 

[FinanceDude]

Numerous studies have pointed out the foolishness of "timing the market". I think the last one I read stated if you miss the best 5 days of the market, you miss about 50% of the return for the year.............

 

[al_bundy]

Numerous studies have pointed out the foolishness of "timing the market". I think the last one I read stated if you miss the best 5 days of the market, you miss about 50% of the return for the year.............

can you post a link to at least one of these studies

 

[FinanceDude]

can you post a link to at least one of these studies

Here's one of them, I'll look for the other. I tend to read stuff and pitch it, so I don't kee every report I read:

[url]http://www.jwafinancialgroup.com/book/chapter1i.html [/url]

 

[tricky88]

Unless I've misunderstood, it has got one obvious flaw - what if the next down day occurred after a series of up days?

Say e.g. you would normally invest on day 1. You wait till a down day to invest and prices go as follows:

Day 1: 100
Day 2: 110
Day 3: 120
Day 4: 130
Day 5: 125

In this scenario you would have been better off investing on day 1.

I do something similar to Accountingsucks. I don't consider myself a market timer, and I have a couple of DRiPs that just invest every month like clockwork... But, I do invest a chunk into ETFs once a month, and I generally do it on a market-tanking day. If no market tanking day near the end of the month, I just buy it.

Random Walk's post is right: It may often be better to invest on the first day rather than wait for a dip which will give a price still higher than it was earlier in the month. But at least for me, I like the idea of buying a chunk on a day the market drops 100 points or so.

 

[TromboneAl]

Years ago, when still in the accumulation phase, I read about the turn of the month effect, and set my automatic monthly contributions to occur on the 20th of the month.

 

[al_bundy]

Here's one of them, I'll look for the other. I tend to read stuff and pitch it, so I don't kee every report I read:

[url]http://www.jwafinancialgroup.com/book/chapter1i.html [/url]

and yet it doesn't take into account if you had missed some big drops during that time and bought in after a low

and this "study" is from an investment company whose interest is to have you invested in bear markets as well

 

[justin]

Years ago, when still in the accumulation phase, I read about the turn of the month effect, and set my automatic monthly contributions to occur on the 20th of the month.

I had never read anything, but I set my autoinvests to occur on the 10th and 25th in order to avoid the 15th and 30th typical 401k autoinvest dates that most 401k's force you into.

 

[al_bundy]

this is a daily chart of the nasdaq from 2003. a lot of strange drops in the end of the month

 

[FinanceDude]

and yet it doesn't take into account if you had missed some big drops during that time and bought in after a low

and this "study" is from an investment company whose interest is to have you invested in bear markets as well

Which is why I take it with a grain of salt..........

All I can say is I don't have the time to watch the market every second like I could if I was a bored FIRE'd investor or a professional day-trader. I have the expertise, but not the time, and life's too short, so I probably never will day-trade............

 

[al_bundy]

the thread was originally about planning your DCA around a time of the month instead of letting your fund manager handle it. i've looked at a lot of charts and the market seems to correct a little around the same time on a lot of months. if you watch it, you may be able to make 1% extra a year and control your losses since you are buying shares a little cheaper.

 

[FinanceDude]

the thread was originally about planning your DCA around a time of the month instead of letting your fund manager handle it. i've looked at a lot of charts and the market seems to correct a little around the same time on a lot of months. if you watch it, you may be able to make 1% extra a year and control your losses since you are buying shares a little cheaper.

Usually you see the inevitable rebalancing at quarter end for the mutuals. I guess the only thing I do proactively is wait until mutual funds with big estimated cap gains pay them, and then buy the shares at a reduced price..........