Maximizing time in the market

[L2]

They say time in market > timing the market. Do you try to optimize your time in the market?

Maybe this has been discussed ad nauseam on here or maybe not. My plan for next year is to max my ROTH IRA on January 1st rather than say make equal contributions throughout the year. Assuming a 7% average rate of return, if you make even contributions throughout the year, you are only looking at a 3.5% estimated return for your contributions for that year, assuming all things equal. If you have the cash and max it on day 1, you are looking at 7%, a gain of 3.5%.

Also considering doing the same thing with my 401k. Unfortunately my employer only allows me to adjust my contributions once every 6 months. But if I were to max my annual contributions by the end of June rather than the end of December, you are looking at a 5.25% return for the year rather than 3.5%. This isn't the case for everybody, but maxing out my 401k contributions wouldn't affect my match any as my employer contributes 3% no matter your contribution.

Do any of you do this? What are the holes or are there any opportunity costs in my theory? Maximizing my ROTH on 1/1 would be funded by partially depleting e-fund/house downpayment savings that would be replenished during the year. I haven't done the math but this seems like it would make a considerable difference over 15-20 years.

[Aggie1999]

With the 401k make sure you understand how your employer match works. On some plans if you hit your $18k before the year is up the employer will not reimburse you for the missed cycles (called a true-up). Other plans they will reimburse but only if you are employed on such and such date (for mine it is Dec 31st). I would not max out early where I had the possibility of loosing any of the match.

[ChpBstrd]

The ROI of this strategy is not as straightforward as your example suggests. In the long-term, markets go up, but as you zoom in markets more resemble a random pick from a normal distribution. That's why you can't divide 7% by 52 and come up with anything like a useful prediction of weekly returns.The 6 month timeframe we're discussing is somewhere in between long and short term. In terms of probability, it's worth doing, but don't expect consistent wins from this strategy.

More importantly, if you're saving at a steady pace through your income, you'd have to set aside money the year before in order to max your Roth on Jan 1. This would be time in cash. Similarly, if you maxed your 401k in the first quarter of the year, the rest of the year's savings would have to go somewhere. Realistically, for the Roth, you're talking about building up a taxable account all year until the next Jan 1 rolls around. For the 401k, if you can max it out in the first X months of the year, you're also able to save about that much the other days of the year. As long as the taxable account is fully invested, you're actually saving/investing at a steady pace and moving funds around at different times.

[WildJager]

Vanguard agrees with you.

https://personal.vanguard.com/pdf/s315.pdf

[JohnSteed]

The ROI of this strategy is not as straightforward as your example suggests. In the long-term, markets go up, but as you zoom in markets more resemble a random pick from a normal distribution.

Nobody is expecting 3.5% every six months any more than they are expecting 7% every year.  That doesn't invalidate the argument.  If your cash only spends half the time in the market, you should only figure on half the expected return.

More importantly, if you're saving at a steady pace through your income, you'd have to set aside money the year before in order to max your Roth on Jan 1. This would be time in cash. Similarly, if you maxed your 401k in the first quarter of the year, the rest of the year's savings would have to go somewhere.

the money can spend the bulk of the time invested in a taxable account.  It doesn't need to sit in cash for very long at all.

[talltexan]

What about using a balance transfer to put $5,500 into your Roth on Jan 1, then paying the $5,500 off over the course of the year. There should still be a spread, and that way you're maximizing time in the market.