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