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I want to make monthly purchases of an S&P 500 index mutual fund. Most of the time (according to the numbers I looked at), if the index closes down for the day, the mutual fund's NAV will decrease at the end of the day. After all it's just tracking the index. So here's the question:

If I put in an order to buy shares of a mutual fund before market close (4 pm New York time), the order will be filled at the NAV that's calculated that day (according to my broker). If the S&P is about to close down for the day, I can be fairly certain that the NAV of the mutual fund will be down for the day, so I want to "time the market" with my buys and place my order a few minutes before the market closes. That way I can be pretty sure I'll buy in on the downswing.

Other things I thought of: there are, on average, 9-10 trading days with negative returns each month since 2001, so if I want to invest $99 (i.e. about $100), every time I buy during the month, I buy in with $11. I could make this more conservative in case there aren't 9 days with negative returns during the month, and just buy in on the first 5 trading days with negative returns each month.

Is this a good strategy? I'm wondering if this is something to do with long-term savings because over time, it'll build up slightly more (or maybe a lot more) shares in the fund than if I just bought in twice a month with each paycheck. I don't pay any commissions or loads to invest in this mutual fund, and it's expense ratio (.05%) is the same as the corresponding ETF.

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    Have you checked what time mutual fund companies will process your order? They may have a different cut-off time than the general stock market. Additionally, I'd beware of fund distributions that may also lower NAV that you'd have to handle here. – JB King Mar 1 '14 at 1:26
  • Your strategy will work so long as the market is overall bullish, i.e it does not close down and next day keeps dropping. But whether it will generate profit after paying loads and commissions is something to consider. I guess what you are proposing is some kind of deterministic arbitrage if i understood anything:) – Victor123 Mar 1 '14 at 1:46
  • @JBKing I put in more info since the info about timing comes from my broker; as long as my mutual fund order is in before 4pm EST itll fill at the price that day. can you elaborate what you mean about fund distributions? Im not worrying about the situation where the index rises, but the fund's NAV falls (for example in the case of a distribution) and that doesn't happen all that often for an S&P index so I dont think its a big deal) – Michael A Mar 1 '14 at 3:45
  • @Victor I don't pay any commissions or loads on this mutual fund and the expense ratio for the fund is the same (.05%) as the expense ratio for a corresponding ETF (VOO for example) and its much lower than the expense ratio for another ETF like SPY. – Michael A Mar 1 '14 at 3:47
  • @Victor Good point about this only working when the market is bullish though. I could always switch to basic DCA if the market turned bearish though, or run some basic filter (like a moving HP or something) to give myself a rough idea if the market looks bearish and switch to DCA if that hits. its pretty basic but it would give a rough idea. – Michael A Mar 1 '14 at 3:52
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In effect, you are asking about an algorithmic trading strategy's implementation and results. For those who find the phase gibberish - You have a trading strategy that you can describe in such a way that I can write down a series of rules to tell a reader when you'd plan to buy.

You can easily pull down the S&P daily closing numbers going back for decades. Take the numbers and see how your strategy would work. A spreadsheet can give you the power you need to do the calculations, a column that indicates 'down' days, and those are the days to buy. Compare that to the standard DCA (dollar cost averaging) which suggests the buys simply occur weekly or monthly regardless of market.

(Obviously, this isn't an answer, but too long to comment, it's the method you can use to test the results. My gut says 'not likely' to beat DCA)

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