Timing Entries into Your 401k

Jan 3, 2009: 9:15 PM CST

I wanted to call attention to a study by Rob Hanna of Quantifiable Edges regarding using a simple timing mechanism to try to achieve better returns over an 11 year period in a hypothetical 401k.

Rob’s post “Should You Time Your Entries into Your 401k?” addresses this question and tests the difference between equal contributions on the 15th and 30th of each month vs entering when a 2-period RSI registers below 20 (which would indicate an oversold market with the expectation being a rally was due).

Read Rob’s post for the full details, but Rob found no significant difference between the two strategies – using the RSI timing strategy produced an additional profit of $30 over an 11 year period vs fixed contributions (assuming $100 per contribution).

It wasn’t really that finding that got me thinking.  It was this sentence which Rob casually glanced over:

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

He states that, “If someone placed $100 into their 401k twice a month for the last 11 years the total invested would be $26,400.”

Hanna starts the hypothetical investment 11 years ago on 1/1/1998 and notes that the combined $26,400 would have lost over $6,600, or 25%!  That’s what caught my attention.  Holding an investment 11 years put you down 25%.  I had to see that on a chart:

Keep in mind, the investor was contributing $200 per month throughout the entire up, down, up, down cycle from 1998, but even without that, had an investor purchased in 1998, he or she would be roughly flat or down (not including dividends) to this day.  That’s quite a difficult pill to swallow and is a reason many people are becoming frustrated with their investments.

Even famed Legg Mason investor/money manager Bill Miller’s Value Trust Fund (LMVTX) is below the price levels it listed in 1998 (it began 1998 at roughly $30 per share and began 2009 near $25 per share).  Keep in mind Mr. Miller has outperformed the S&P 500 for 15 consecutive years… until 2007 and 2008.

It goes to show how much shareholder and investor equity has been wiped out in the 2007 to present Bear Market.

Nevertheless, Hanna concludes his informative post with a statement that perhaps other investors should echo:

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.

UPDATE:  Reader Rene provided us a link to research from MarketSci entitled “Moving Average Crossovers Debunked?” which examines the relationship between the 50 and 200 moving averages as a long-term timing vehicle.  They also conclude, “generally speaking, moving average (MA) crossovers have had some predictive power, but when used alone they are really only useful for staying out of protracted drawdowns…traders are much better served using shorter-term, more active strategies”.

Corey Rosenbloom
Afraid to Trade.com

14 Comments

14 Responses to “Timing Entries into Your 401k”

  1. toad37 Says:

    Thanks, intersting post. It will be just this sort of thing that will keep the current generation from investing in the market for years to come in my opinion. Look for savings accounts to rise.

  2. Corey Rosenbloom Says:

    Toad,

    There’s a general pattern that dates back to the 1930s which is a 12 year cycle. There’s 12 years up, 12 years flat, 12 years up. The last up cycle ended in 2000 which would ‘predict’ a flat, range market like we’re experiencing to last until 2012. So we probably will have another up move and then perhaps by 2013 or so, we’ll break back upwards into a 12 year expansion. But I’m getting way ahead of myself.

  3. chris Says:

    Cory,

    One problem with 401K is you have two trading options. Long or Cash .. You cannot short. I’m glad I went to cash and now I’m back in playing this Wave 4 bounce. Will exit again and re-enter again once a Wave 5 completes. I’m 40 and all my buddies thought I was NUTS going to cash at DOW 12600 they kept telling me my thinking was NUTS. Well they didn’t listen to good traders like you who understood signals and EW patterns. Now there say will it will come back over time. If Wave 5 plays out and goes below DOW 7600 I’ll be so thankfull. It will be great to enter again at lower prices. I’ll have 20 years for this money to grow. It will be a good move.

    I love all these BULLS and bottom is in talk. If you follow EW a bottom cannot be in yet since we haven’t had a Wave 5.

    Thanks for the good work

  4. Anonymous Says:

    How about a simple study on the 401k account where you go long when the 10 crosses above the 30 and go to cash when the 10 crosses below the 30, since 1998. Add contributions only when you go long.

  5. Corey Rosenbloom Says:

    Chris,

    True, and I think Rob’s study addressed that point. He was looking at timing long only entries over the 11 year period, as in fixed (twice a month) or tactical (each time the 2 RSI triggered).

    I moved into cash early in 2007 but held a few long positions in my retirement account but exited those in May. I remember a time when I was afraid to write the word “Recession” on my blog and put it in quotation marks because it was unacceptable to use the word in early to mid 2008 – almost like you were a pessimist/heretic so I see where you were coming from.

    I still believe the big 5th wave is yet to come, but that we will have to go through a 4 up rally. According to EW, a bottom cannot be in, and given the optimism that a bottom is formed, a bottom cannot be in.

    Bottoms are only formed when everyone gives up and decides there is no bottom in store. Once that pessimistic view becomes mainstream to the TV news and public, then we’ll have our bottom.

  6. Corey Rosenbloom Says:

    Anon,

    Would be a great study from a long or cash perspective. I’ll try it in TradeStation and pass it on to Rob if I can’t get it to work.

  7. Rene Says:

    Rob forgets to examine/mention exits and is focused on buy & hold. Marketsci Blog (http://marketsci.wordpress.com/2008/09/21/moving-average-crossovers-debunked/) makes a good post on the use of simple moving average crossovers versus buy & hold. I use timing in my IRA equivalent (I live i Denmark) – not in an attemt to outperform but to limit downside risk…exiting in 2001, entering in 2003 and exiting i 2007 has saved me a lot of grief. I see no reasons to enter yet.

  8. chris Says:

    Corey,

    Thanks for keeping us updated on Wave 4. Appears SPX 1075 level near 50% retacement (If it gets that high) will be good area to exit longs and raise cash for Wave 5 move to start. If we get SPX 1140 area or near 61.8 retacement I will get short.

    On a side note did you get a chance to check out breakpointrades.com yet? I made Matt/Steve aware of your site and that you would be checking breakpointtrades out. Matt/Steve are like you they do tech. discussion and are great for people like me who work full time. I cannot watch market live everyday. They have saved me alot of money on there calls of market trends/directions and explain in detail why etc.

    Very much how you do it.

  9. Lam Says:

    Corey,

    Very nice post, I realized this a few years back and had since then reduced my contribution to my 401k and put into my trading account. Using trend definition, higher highs and higher lows, I put my money on those etfs with long-term trend (weekly/monthly) until that trend is broken. ETFs has been increased so much that it makes that strategy much more easy. So far it’s very successful.

  10. Corey Rosenbloom Says:

    Chris,

    I checked out their site and I love it! It’s so detailed (I browsed a couple of past newsletters) and they’re so thorough – you really don’t see that kind of thoroughness outside of large institutions.

    I’d love to learn more about them and perhaps how they got to where they are/background.

    Thank you for passing along the information!

  11. Corey Rosenbloom Says:

    Lam,

    There are both simple and complex strategies for timing the market but I find simple ones work the best.

    Noticing the above chart, one could use the simplest method which looks at swing highs and swing lows (trend confirmation) and then confirms that perhaps with a moving average crossover/orientation method. There have been stable moves up, down, up, and down over the last 11 years and I would suspect the pattern would be effective going forward.

  12. Corey Rosenbloom Says:

    Thanks Rene,

    I added your link into the post text to broaden the discussion.

  13. chris Says:

    Corey,

    Glad you liked Breakpointtrades. How can I get them in contact with you. Do you have an email you could send me. I’ll pass it along to Matt/Steve. I’m thinking you both could help each other out however going to let you too work this out etc.

    Let me know

    Thanks
    Chris

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