Is anyone else hoping for the stock market to fall? The S&P 500 index dropped over 10% earlier this year, but it has been on the upswing for the last two weeks. I’m hoping the stock market would fall even more because I haven’t finished contributing to my solo 401k for 2015 yet.
I contributed $1,500 every month last year and I maxed out the employee salary deferral portion of my i401k. The maximum contribution for 2015 was $18,000 for those under the age of 50. I also contributed $2,000 extra as the “employer contribution” to bring my total up to $20,000. The solo 401k enables you to contribute 25% of your income as employer contribution if you’re self employed. The problem is I don’t know exactly how much I can sock away in my 401k until I finish doing tax. Anyway, I’m almost done with tax and the result is I can contribute $24,500 to my solo 401k for 2015. That’s why I want the stock market to drop in the next 30 days or so. I need to contribute $4,500 to my solo 401k before April 15th and it would be nice if the market is down when I do so.
Market Timing doesn’t work
Theoretically, I shouldn’t even worry about it and just pull the trigger right now. Market timing doesn’t work for individual investors for variety of reasons. Let’s take a look at some of them.
- Dollar cost averaging is easier for most people. Most regular people get paid on schedule and it’s best to invest right away via automatic deduction. If you wait, then you’re more likely to spend the money.
- Time in the market. The stock market is set up to grow. In the long run, we will see more good days than bad ones. If you have a lump sum to invest, the odds are better to invest it as soon as you can. That way, you will be in the stock market longer and benefit from more growth.
- Market timing requires 2 correct decisions. You need to know when to sell and when to buy. If you’re wrong on either one, then you’ll lose.
- Even professionals can’t do it. Less than 1% of mutual fund managers beat the stock market index consistently (after taking expense into account.)
- Market timing cost money. You need to pay transaction fee whenever you make a transaction. If you do it frequently enough, the fee will nibble away at your portfolio. You also will need to pay tax on any gain. You will need to significantly outperform the index to beat it. Actually, this one doesn’t matter in a 401k because tax is deferred and you usually don’t pay transaction fee in your 401k.
It won’t matter much in the long run
Lastly, it won’t matter much in the long run. $4,500 isn’t that much money. If the stock market falls 10% the day after I invest $4,500, that’s a decrease of just $450. That’s less than .5% of my solo 401k balance. Of course, it would be nice to get in at a low point, but it won’t make much difference in the long run. As long as you keep adding to your 401k, your portfolio should look like this graph below. This is why I max out my 401k every year.
I love this graph and I hope to keep adding to my solo 401k for as long as I can. I use Personal Capital to keep track of my portfolio and it’s easy to check on any of my accounts. You can also check how much fee you are paying in your retirement fund with their 401k fee Analyzer. I’m paying just 0.17% on my solo 401k, that’s pretty darn good. Sign up for a free account with Personal Capital if you don’t already have one.
Disclosure: I may receive a referral fee if you sign up with Personal Capital through the link above.
Are you in the same position as I am and hoping for the stock market to fall so you can pick up some shares at a bargain?
Image credit: by decade_null