A Better Way to Invest in 401(k) and Get Better Return?

I got this idea when I was visiting MoneyMonk yesterday and reading his post on saving a little more in 401(K) by contributing 20% for the first three months and 12% for the rest nine months of the year. Since I started to contribute to my 401(k) plan, I always set a fixed percentage point at the beginning of the year the forget about it until next January. This is the same as I do dollar-cost-averaging (DCA) in my taxable mutual fund investments: automatically contribute $100 to each fund at the beginning of the month.

However, in the wake of my recent little study of DCA which shows that DCA every month may not give me the best returns as compared to other investment schemes, I think I want to make some adjustment on how to contribute to my 401(k) using the same method as what MoneyMonk uses. Since the deduction from my paycheck is on a biweekly basis which I can’t change, I can set a higher contribution percentage for the first half of the year, then switch to a lower percentage later so I won’t exceed the contribution limit. If history is a guide, I can purchase more shares with the same amount of money early in the year than what I will get later in the year assuming the trend of the overall market is up for the next 10, 20 years. By contributing more early, the long-term performance should improve, especially for a 401(k) account which I will hold for decades before withdrawing any money out of it.

Is this a better way to invest in 401(k) and get better return? I have no way of knowing it, but it’s worthy trying.

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5 Responses to “A Better Way to Invest in 401(k) and Get Better Return?”

  1. Yan |  Jan 18, 2007 at 5:46 pm

    No doubt, the sooner you start the more return you get. Start 529 college savings for your kids while your wife is still pregnant and reduce your monthly contributions while achieving the same end result. The same logic applies here but in a time frame of each year.

    The question is “do you have the extra 8% needed in the first half of the year?”

  2. The Sun |  Jan 18, 2007 at 10:14 pm

    The question that whether we will have a sizable money available at the beginning of the year to make one-time investment is a valid one for taxable accounts because you control when and how much to invest. For a 401(k) account, on the other hand, not everybody has the flexibility of choosing their own frequency. I feel contributing a little more in the first half than the second half may bring me a better return. But this is only a thought and I haven’t put it into work yet. I want to try it and at the end of the year to compare how many shares I buy with this scheme against how many I would buy with a fixed percentage. It would be interesting to see, though one year is not enough to get any concrete conclusion. And it will depend on whether we will have a up or down market this year.

  3. Yan |  Jan 19, 2007 at 12:17 am

    You don’t have to wait for a year. I suggest modeling it out instead. It shouldn’t be too hard. Just need to find the right investment calculator online.

    As for “enough money”, what I meant is that not everyone can afford bumping up the contribution rate up to 20%. Sometimes fixed 15% is all you can do or you will have to borrow against your future revenue and pay interest on the loan thus nullifying your potential advantage.

  4. Investing Guide 101 |  Jan 19, 2007 at 12:31 am

    Hello The Sun, a good resourceful site on finance.

    Thank you for sharing your helpful information and the link of Money monk website it’s also a good blog.

  5. Investing Guide 101 |  Jan 19, 2007 at 12:34 am

    Hello The Sun, a good resourceful site on finance.

    Thank you for sharing your helpful information and the link of Money monk website, also a good blog. I liked your idea of making bigger contribution in the begging of the year and later we can invest with the money.