Let’s be clear: market timing is a fool’s errand
First things first. Do not try and time the market as a rule. Passive investing is just that. Set and forget.
If you are dollar cost averaging by investing the same amount at monthly intervals, the day of the month is not going to make or break you on the path to wealth.
However! There could be a small amount of benefit from avoiding the worst time of the month.
Using seasonality to look for favorable periods in the month
In the 1970’s, Norman Fosback suggested that the last two days and first five days in a trading month were optional in a book called Stock Market Logic.
Then in the mid-80’s as investors became aware of this trend and started to get ahead of this monthly rally, it shifted to the last three trading days of the month and the first two of the next.
Now that passive investing might make up as much as 37.8% of all investing, has the seasonality meta changed again?
The hypothesis would be that this influx of passive investors will typically set their automatic deposit for the start of the month, right after they are paid, and before they have a chance to spend it!
Does this cause an influx of cash at the start of the month?
Analyzing the daily pricing of an index fund
I’ve looked at the price of investing each day since the inception of the popular Vanguard fund – FTSE Global All Cap Index Fund GBP Acc.
Since it was launched in November 2016, there have been 1491 possible days to invest, as of 7th October 2022.
Below, I have taken the price per share each day of the year for nearly 6 years and calculated the average price for each day of the month.
I then imagined 31 individuals who each invested £1,000 a month for 6 years, each on a different day of the month. For example, person A always invested on the 1st of the month for 6 years, person B always invested on 2nd of the month for 6 years, and so on.
Let’s get to the results: when is the best day of the month to invest?
The average price of a share for someone investing on the 1st of the month was £138.81. The average price of a share for someone investing on the 31st of the month was £134.80. On average, £4.01 cheaper for the person investing at the end of the month.
Investor A put £1,000 in the fund on the 1st of the month for all 71 months since November 2016 (just shy of 6 years). They invested £71,000.
They then sold it today, at the current price of £167.79 (October 7th, 2022), they would have £85,825.82 (ignoring any fees for simplicity).
Investor B on the other hand, invested on the 31st of the month for all 71 months. They had £88,374.17.
So, after 6 years, person B had £2,548.35 more based on the day of the month selected.
Here are the results for each day of the month, with red representing unfavorable outcomes and green representing favorable outcomes.
If we look at 3-day, 5-day, and 7-day moving averages, there is a lot of noise, but favourable outcomes in the middle of the month.
Considering ‘time in the market beats time in the market’, the earlier part of the middle of the month (13th/14th of the month) is probably ‘safest’.
So what can we take away from this?
I think the hypothesis that the start of the month has an abnormally high price, does hold some credence.
It might be due to passive investing. If you give them your money at the start of the month, the institution will invest it as instructed, at the start of the month.
There might be other factors at play causing the start of the month to be the worst time, perhaps due to pension / 401k payments too.
I don’t believe I can reliably draw any other conclusions.
The end of the month may possibly be the best time to set your deposit, but the data is limited. There is so much noise in the middle of the month, it’s hard to say anything other than it’s probably better than the start of the month.
Avoiding the start of the month I think is a good idea, but it won’t make or break your wealth.