Timing, forget the timing

February 19, 2008 7:21 AM

Automatic investment plans (e.g. employee retirement accounts) often seem to make their investments on the first day of the month. If millions of people are known to consistently invest in markets on the same day of each month, does this have an effect on the price of what they purchase?

More specifically, I've always wondered if the amount of money invested in this way gives other investors an opportunity for market timing, say on stocks that are most widely held in mutual funds. Or is the amount invested in this way just a relative blip? Or, more likely, am I misunderstanding how the process works?

posted by alb to work & money (7 comments total)

One offsetting factor is the retired employees selling each month to get that month's retirement income.
posted by smackfu at 7:39 AM on February 19, 2008

I'm sure others will answer this more thoroughly, but here is a list of issues that might minimize this effect:

- Not all retirement contributions happen on the first of the month. Many happen on pay day, for exmple.

- Retirement accounts holdings and individual investment accounts in general make up a relatively small part of the total market.

- Contributions are a relatively small amount vs the total amount of existing investments in retirement accounts. Compare this with a hedge fund that might sell 10% of its holdings on a given day and invest it in a single stock.

- Many employees invest in funds rather than directly in stocks. That money is not necessarily used to buy stock as soon as it is contributed by the employee.
posted by burnmp3s at 7:49 AM on February 19, 2008

One offsetting factor is the retired employees selling each month to get that month's retirement income.

Presumably, more is bought than sold, no?
posted by Blazecock Pileon at 8:20 AM on February 19, 2008

More specifically, I've always wondered if the amount of money invested in this way gives other investors an opportunity for market timing, say on stocks that are most widely held in mutual funds.

I doubt it. As burnmp3s writes above, a contribution that goes into a mutual fund doesn't just flow automatically into the stock market. If a upward swing at the start of the month did start to show up, I suspect that fund managers would shift their buying to later in the month to compensate, but I'd be surprised if such an upward swing could be found within the regular noise of the market.
posted by ssg at 8:20 AM on February 19, 2008

I wouldn't use the idea of 401k money coming in to inform a trading strategy, but planned buying/selling itself is common enough. Index reconstitutions are a well-known example of this and the index providers struggle with it. See what happens when a stock is added or deleted from the S&P 500.

A fairly regular example of planned buying/selling is in commodities. The GSCI rolls the contracts they use to calculate index on the 5th through 9th business days of the month. Those who want to track the GSCI will be buying and selling on these days. The exchange tells you that you might want to buy ahead of them.
posted by milkrate at 10:56 AM on February 19, 2008

Thanks for the helpful replies. I'm not looking to develop a personal strategy--just curious as to whether the described phenomenon exists.

In reply to burnmp3s good points, what if you limit the question to the net asset values of mutual funds themselves, rather than the larger market of stocks or other assets? Presumably investments into mutual funds are a purchase of fund shares on that date, even if the money is not used by the managers to buy stock until a later point...?
posted by alb at 11:57 AM on February 19, 2008

Most funds (and hence 401(k) plans) keep a pool of cash on hand to smooth out purchases and redemptions over a period of time. Read the prospectus for a fund to see the exact details.

One of the stated reasons to have this pool is to avoid a situation like this, where a large amount of money comes in (or has to go out) on a certain day. It can be spread across the entire month.
posted by printdevil at 2:37 PM on February 19, 2008