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
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.