I've seen recommendations to establish periodic automatic investments, but I've often wondered how to determine the schedule for those investments. In some cases, like my 401(k) and HSA contributions, the investments are made from my regular biweekly paycheck, so I don't need to decide on the scheduling. For my taxable and IRA investments, I've been making weekly automatic investments of $400 and $200 (until I reach the maximum annual contribution limit), respectively. Does anyone have any thoughts on how frequently periodic automatic investments should be made?
I must say that I love the questions you're posting Aaron G. Again here is my opinion.
There are some rules of thumb in investing. One such rule is that time invested is probably the most important in terms of accumulating wealth. There are articles on this very site that show how compounding works in your favor the earlier you start. In such instances, the more money you can put in earlier the longer it has to compound hence it's probably more advantageous to do a lump sum instead of periodic automatic investment (aka dollar cost averaging). FYI Vanguard also did a study on this for the period between 1926 -2011 and found that lump sum had greater gains 67% of the time.
Now lump sum may not be possible and in such cases periodic investments is a great plan. It is a great plan because as another rule of thumb is we can't time the market. Hence, periodic investments work really well in such cases. In such moments, I take things mathematically. The more frequent the contributions the more representative the average and that would depend on what your accounts allow you to transfer. For mine it's about 6 transfers a month from an online savings account. So I do some of my periodic transfers on a weekly basis. That way I have at least 2 transfers in case I need to do one on emergency. If you don't want as much outflows I would do a minimum of quarterly transfers as that is the reporting requirements of companies by the SEC.
Lastly, I would be remiss if I didn't mention the possibility of timing the market. In such instances even with broad based indexes would use technical analysis to determine if it is time to head in the market. I know that is vague but technical analysis is a whole other thing to learn, but it is a way to keep your opinion out and determine an entry point with less bias.
Thanks, Micky H. I feel like my wife and I are doing well financially, but there's always plenty more we can learn!
I'm well aware of the power of compounding and how time affects the growth of investments. And while I can remember a time when I had a pile of cash sitting idle in a high-yield savings account, I've made a conscious decision to invest as much of that cash as possible given my time horizon. So other than our spending accounts and an emergency fund, everything else is invested. In that I'm not periodically investing regular amounts from a lump sum, I wouldn't consider what I'm doing as purely dollar-cost averaging, but rather something closer to periodic investment.
You mentioned conducting periodic transfers on a weekly basis, which is what I've been doing. If you weren't limited by the number of withdrawals from your online savings account, do you think you would see a significant benefit to conducting periodic transfers on a daily basis?
So mathematically I would say conducting periodic transfers on a daily basis would allow for better averaging. So, basically you would get closer to the historical average return from the market of 10% a year give or take.
On the other side based on experience and charts I've seen there isn't much difference between weekly and daily transfers. In fact I would go as much to say there is bigger difference with timing. It is better to purchase an index or stock toward the end of day and the beginning of the week historically. Now I know you can't time the market but adding it with those factors will actually net you more returns especially with a broad based index. The reason for this is most stocks earnings come after market closes so you'll need to be in it before it goes up. Also most bad news can come out during the day and their is reaction later in the trading day. Hence if it is a broad based index it is likely you will buy on the lower. As to why Monday is the worst day for gains, well I'm not entirely sure of that. But it's worth a shot.
I'll admit that I've dabbled a bit in technical analysis. Similar to the idea that it's historically better to invest at the beginning of the week and at the end of the day, some studies have shown that the 19th of the month is the market's worst performing day and the 9th of the month is the market's second worst performing day. What does it all mean? I find it difficult to strike a balance between technical analysis and the idea of buy-and-hold indexing, especially when it seems at odds with the caveat that past performance is not an indication of future results. Particularly when different aspects of technical analysis contradict one another, for me, I find that it can be a hindrance that results in decision paralysis.
I'm in agreement. Hence I've simply created rules to follow and choose not to regret the outcomes. So I figure if I'm going to periodically invest weekly I choose to set it for Monday because honestly it will dollar cost avg regardless whichever day I choose. Also although historical performance does not indicate future performance there isn't anything else to go by so I might as well pick the day where it historically is best.
As a buy and hold individual for the majority of my investments I don't necessarily use much technical analysis, only the timing above to make my periodic investments possibly more efficient.
With my sandbox of stocks I personally pick. I put it to a fundamental lens first, than I would put a technical filter on top of that. For the technicals each one I use is scored as a 1sell 2hold and 3 buy. I average all the results from the ones I know how to use and if it averages over 2.5 I buy. So for me it's just rules to get over decision paralysis. It's not most efficient and I've not bought some real good winners but to me good investing is sticking to an investing plan. I will occasionally change my rules if I'm missing it too much on gains. Initially I was a value investor of sorts and it was stagnant, so I had to change rules to get a better financial picture.
Personally, I've just set mine to happen on the Monday after our paycheck is deposited, every 2 weeks because that's our pay period. But like @Mickey H., I suspect daily would average you out the best.
