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By now most of you know that I automate 90% of my investing in passive index funds. The other 10% of my portfolio is in stocks that I like. I know that trading stocks can be a fruitless proposition, but I’ve been able to beat the market over the last couple of years. More than anything, I have fun doing it. With that said, 10% is such a small amount, so it barely makes a ripple in my overall portfolio.
Specifically, the remaining 90% of my investments are automated into the Vanguard 500. I’m a big fan of dollar-cost averaging and not trying to time the market. I strongly subscribe to the maxim that it’s “time in the market, not timing the market”, which yields positive investment returns. When I get too cute, I start second guessing myself and then the cash piles up. By then, I’m too afraid to do something because I’m chasing those returns.
Since I don’t time the market, I did wonder if there was any benefit in which day that I automated my investments. Most people probably say the best day to automatically invest is the day that you receive your paycheck. That way you don’t have to worry about when the investment occurs.
So let’s say that you have a $100 to invest for the month. You can either invest the $100 all in one day or spread it over four weeks during the month. Which would make more sense?
The Market’s Best and Worst Days of the Week
A study by the Journal of Economics and Finance, “The Day of the Week Effect on Stock Market Volatility” reviewed 25 years of daily S&P 500 data and concluded that Wednesday was the best day for the stock market. On average the stock market went up by 0.032% on this day.
So that settles it, should I buy on Wednesday? Sure, if you want to buy at the top of the market. Monday has historically been the worst for stocks based on the day of the week. It’s actually the only day of the week that had a negative return, -0.0028%. Investors are constantly encouraged to buy low and sell high, so buying on the worst day of the week would be a good idea.
It got me thinking, why is it that Mondays are the worst performing day? Then I thought about it, and the light bulb went off. Companies, like politicians, like to dump bad news on Fridays after the market has closed, when they think nobody is paying attention. By the time Monday comes around, the market has had time to digest the news and make a correction to the stock.
Best Day of the Month
Okay, so now that we know that Monday would theoretically be the best day to buy if we were dollar-cost averaging on a weekly basis. What would be the best day if we were buying once a month?
In my research I found that stocks perform better towards the end of the month and the very first day of the month. This is because many U.S. workers are paid on the 30th, 31st or 1st.
Morningstar cited a paper in the Fall 2006 issue of The Journal of Wealth Management, by John Paglia and Xiaoyang Jiang, who studied the stock market’s performance from Jan. 1, 1990, to Dec. 31, 2005. They concluded that the best day of the month to invest was the 23rd.
Changing When You Invest
So, now it’s settled. We now know the best weekday and the best day of the month to invest. Should you totally redo how you are currently doing things?
In The Only Guide to a Winning Investment Strategy, Larry Swedroe says:
“If you had invested the same amount on January 1 of every year for 30 years beginning in 1965, your return would have been 11 percent per annum. If you had been unlucky enough to have invested the same dollar amount each year on the day that the S&P 500 Index hit its peak for that year, your return would still have been 10.6 percent per annum. That is less than a 0.5 percent per annum difference in returns. And no one is that unlucky.
If, on the other hand, you were lucky enough to have chosen the market’s low for the year, each year, then your return would have only increased to 11.7 percent per annum. That is an incremental return of just over 0.5 percent per annum. And no one is that lucky. If that does not qualify as much ado about nothing, I do not know what would.”
His advice is straightforward; “The best time to invest is always whenever you have fund available to do so.”
So readers, when do you invest in the stock market? Any other ideas about when the best time to make your deposit? Share your thoughts below.