Should I keep automatic withdrawals for my children's 529 college savings plans, or manually invest every month on down days to avoid buying in automatically on a day when it could be up?
I'm a long-term investor. I buy into my Roth IRA account on down days. I plan on buying and holding into these accounts until I retire: 401(k), Roth IRA and my children's college savings plans (529 plans). I have automatic withdrawals set up for the children's 529 college savings plans. Is it wise to keep automatic withdrawals? Or should I invest manually into my children's 529 account on a down day every month to avoid buying in automatically on a day when it could be up?
I see buying on down days as an added plus to portfolios over the long run, but only when we see big market fluctuations. We never know when these will happen and they can be quite sporadic. This is a very difficult long-term strategy to be successful at. Instead, you should take advantage of compounding interest and dollar-cost averaging by buying into the market on a regular, preferably monthly, basis. Dollar-cost averaging smooths out volatility by allowing your to buy in at various different price points over time. The regular contributions continue to add to the principal, thereby fueling the compounding of returns. Sticking with your automatic contributions is definitely your best bet for success as a long-term investor.
This is a good question. In my opinion, it is difficult to time the market and impossible to do it in a consistent manner. The advantage of an automatic investment strategy such as the one you have in place is that you are making periodic investments irrespective of what is happening in the market and you are dollar cost averaging over time. With this strategy, the disadvantage of buying when the market is up is to some extent balanced by the advantage of buying when the market is down.
So, why not buy when the market is down and not buy when the market is up? The problem with this strategy is that nobody knows if a particular up day will be followed by a down or up day and if a down day will be followed by a up or down day. What we do know is that over time markets exhibit significant momentum (ie up days follow up days and down days follow down days) AND markets are up more often than they are down. So, if you wait for a down day and have a threshold of how much down it must be before you invest, then you will be missing out many up days and once you get in after a down day, on average your down day is likely to be followed by more down days. We have run the numbers on this- please send me an e-mail and I can share the analysis with you.
Of course, I am assuming that you are only considering market movement and are not considering any other fundamental or macro-economic factors when making your decisions.
I surely understand the want to invest on down days however this is a losing strategy. In theory if you knew every time the market would be down and could rush the funds in there that day sure it could work. The reality is execustion and logistics just don't work in your favor. For starters, you'd have to know in advance when the down days are, which means you wouldn't be investing on up days and getting your money invested sooner. Next how much would the market have to go down for you to invest? If the market tomorrow went up 100 points and you didn't invest, but down 50 the following day and you did you still missed out on the 50 point swing. Furthermore, all mutual funds purchase and sell at the end of the day. Additionally, it usuall takes a few days for your funds to be pulled from your account to be invested to begin with. So logistically if you saw today was down, and wanted to invest the best thing you could do is hope your funds purchase by end of day over the next few days and who knows what the market will do.
So although it is a nice thought in reality I think taking the guess work out and keeping your automatic investment is the best way to take emotion and unknown out of the picture.