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As 2019 rolls around, I am again allowed to contribute to my 457 retirement account...

I know veteran Fools believe that timing the market is foolish...

But here is what I am thinking....

instead of contributing the regular 15% per paycheck...wouldn't it make more sense to try and maybe contribute 40-50% per paycheck if the market continues to decline....?


isn't the objective is to get the money in good when the market is down?

get most of the maximum contribution in the first 3 months of 2019?

Am I being foolish?
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Is this an annual election? Are you suggesting contributing 40-50% of your paycheck year round? Can your budget afford that? I think from your post you are suggesting large contributions until you reach the $19,000 limit for 2019, then changing your elections to not contribute anything the rest of the year.

For me, that's a gamble. You achieve a lot more dollar-cost-averaging if you spread your purchases throughout the year. Chances are this won't be the only market downturn over the next 12 months. Personally, I wouldn't be afraid of some purchases being above the mean and some being below the mean. But I suppose if the downturn is short lived and 2019 blasts out of the starting gate, you could still adjust your contribution rate back to spread your payroll deductions across the remainder of the year.

Fools try to prepare for discount market opportunities but that's different from market timing, which is waiting for the perfect opportunity to take action. Yes, buy low and sell high is always the goal. And who knows how long we'll have the kind of discounts we're seeing right now. We could see better discounts tomorrow or we could have already hit bottom and bounced back. That's the market timing think. My think is that if you have a watch list of companies in which you want to invest, then whether you're at the bottom or not, now could be a great time to act. Whether you buy in whole or buy in thirds or some other strategy.

One thing I might consider, if you are income-eligible, is to first set aside cash for a Roth IRA contribution if you have not already done so, $5500 for 2018 and $6000 for 2019. Then if your budget still can afford the lower net income over the short term as you maximize your contributions, you still have that option.

Fuskie
Who thinks there are probably negatives to your plan beyond what he thought of but Survivor just started so this is all the thoughts you'll get from him tonight...

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isn't the objective is to get the money in good when the market is down?

get most of the maximum contribution in the first 3 months of 2019?


If you believe that the market will end 2019 higher than it began, then it's probably better to front load your contribution, in order to max it out in the first few months. If you believe that the market end 2019 lower than it began, then it would probably be better to backload the contribution. If you think that it will end at about the same level, or you have no idea if it will be higher or lower, then making equal contributions throughout the year is probably the best bet.*

But the question is - why do you think one outcome is more likely than the other, because you really are trying to time the market.

*If there is a matching contribution requires a certain percent contributed each paycheck, then you should probably try to make at least that contribution for each paycheck. This is probably true even if there is a 'true-up' since the true-up often doesn't happen until a month or two after the year is over, thus delaying getting the match into the market. As always, YMMV, and you need to run your own numbers for your specific plan provisions.

AJ
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darrellquock,

You wrote, instead of contributing the regular 15% per paycheck...wouldn't it make more sense to try and maybe contribute 40-50% per paycheck if the market continues to decline....?

I have mine set to 60% of pay. That's the most I can contribute (pre-tax) without impacting my ESPP and other contributions. It doesn't leave much of a paycheck.

I did this last year (I actually started the practice a couple months into 2016) and intend to continue doing this going forward until retirement for a few reasons:

1. Statistically the stock market ends the year higher 75.36% of the time, regardless of how it began the year.
2. Even on a month-to-month basis, contributing earlier wins 59.99% of the time.
3. Contributing earlier locks in my employer's matching contribution earlier. (This might not be true for everyone, but it's a huge win for me because they match contributions 50 cents on the dollar regardless of income and matching is 100% vested on day 1.)
4. My last work year is likely to be short, so contributing early gets me used to the cash-flow issues ahead.
5. I already have enough in taxable assets that the only real problem it creates is figuring out what I might need to liquidate if anything to cover expenses without incurring too much in taxes.

Note: I pulled historical S&P 500 (^GSPC) data from Yahoo into a spreadsheet to come up with the stats. However (^GSPC) is a price index. The correct index to use is the Total Return Index (^SP500TR), but Yahoo only had 30 years of data so I figured more data trumped the inclusion of dividends. But if you do use Yahoo's ^SP500TR you are ahead 65.77% of the time on a monthly basis and 77.42% of the time on an annual basis.

Finally now that I've pulled that data, let me say that the relative return information is a complete red herring in this analysis!

The main reason for front-loading is to shelter money sooner instead of later. That's because to consider front-loading you must have alternate assets available to live off of and it's just as likely these assets are already invested in the market.

Sheltering assets earlier makes sense only because taxes accrue on interest and dividends as they are paid. Assuming on average you can shelter you funds 4 months faster and assuming an average of about a 2% payout ratio and 24% marginal rate, front-loading effectively gives you about an 0.16% boost to savings by the end of the year … entirely from tax efficiencies. Yeah, you read the right. It's really not a lot. But every little bit helps, right? (This amounts to about $30/year in tax savings on average.)

So in the final analysis … front-loading is really just a (very?) small optimization. But it might be worth it to you if you have taxable investments needing to be sheltered.

BTW, I'm eligible for catch-up contributions, which brings my pre-tax contributions to $25,000 in 2019. Also our plan also allows up to $27,500 in after-tax contributions, so I basically won't have a regular paycheck for over half the year.

- Joel
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CMF_Fuskie,

You wrote, Is this an annual election? Are you suggesting contributing 40-50% of your paycheck year round? Can your budget afford that? I think from your post you are suggesting large contributions until you reach the $19,000 limit for 2019, then changing your elections to not contribute anything the rest of the year.

For me, that's a gamble. You achieve a lot more dollar-cost-averaging if you spread your purchases throughout the year. …


I'm sorry, but I think you are looking at this through the lens of your own situation. The only real gamble darrellquock is taking is locking up money in tax-advantaged accounts sooner instead of later. The problem really has little to do with investment returns or market performance.

Also this is only a gamble if you don't have the reserves to handle having little or no income for a while. But if you are considering this option, it's probably not a problem for you. Note: I have about 10 years worth of living expenses in liquid, taxable assets (cash and investments), so I'm in a situation to do this too.

In addition if you have cash and want to invest it in the stock market, statistically it's better to put it in sooner rather than later.

Finally, the main reasons to prefer a (Roth) IRA contribution over a 401(k) contribution are:

1. No matching incentive, and
2. Investment options are inferior.

These two items are not a given, so for a lucky subset of the populate a 401(k) contribution could be preferable. And even if investment options are inferior, front-loading your contributions to max-out the company match as early as possible is still an option.

- Joel
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Thanks for the ideas...

I won't need the funds for another 15-20 years...

I also am sitting on 20% cash in the account to take advantage of times like today..

I was just trying to maximize returns....getting most of my contributions in when there is full on panic in the markets...normally I spread my contributions over the entire year.
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And don't forget its tax selling time. Now until the last 3 business days of the year is time to sell losers to reduce capital gains taxes.

This is another factor putting downward pressure on prices. But the end date is well defined. Perhaps we will get a bottom at that time.
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