At most of my professional jobs I have been paid on a monthly basis, except for the job I currently hold. Now I’m paid on a bi-weekly basis and thus the same schedule for my 401k contributions. This got me wondering if there was any difference in performance between monthly and bi-weekly 401k contributions.
I used three investment options to test: FUSEX (S&P Index), QQQ (Nasdaq Index) and FEMKX (Emerging Markets). In order to capture a wide range of market conditions I decided to go as far back as could with each investment option: FUSEX (1988 – 28 years), QQQ (1999 – 17 years) and FEMKX (1991 – 25 years). Also, I wanted the contributions to be uniform ($100/month), but we all know $1 in 1996 is not the same as $1 in 2016. I used saving.org to adjust the monthly contributions for inflation. Last, I excluded dividends to make the modeling simpler.
Below is the cumulative performance for each option:
Except for FUSEX, the differences are really, really small. Monthly contributions has a slight edge outperforming in two out of the three investment options. Next I examined the returns annually:
You can see from the table above that for most years monthly investing outperforms bi-weekly. The only outlier in the above table is FMEKX where bi-weekly performance beats monthly performance 73% of the time, however you can also see the magnitude of the bi-weekly beat (0.47% average) is much smaller than the magnitude of the monthly beat (0.88%). That explains why there is not much difference in the cumulative return.
In summary I see no consistent evidence that bi-weekly investing would outperform monthly investing. I could expand this analysis further and test if mid-cap and small-cap index funds, or additional types of foreign investment options, or if bonds or stock market sectors outperform one way or another. My guess though that would be a waste of time, I wouldn’t expect much deviation from the results calculated with the range of investments above due to the correlation those other investment options have with the options I’ve already tested. Maybe sometime in the future I’ll test quarterly investing vs. monthly to see if there is a performance difference there.
The small difference in returns isn’t enough to warrant a change in my 401k contribution schedule, I think there are a million other things I should focus on to potentially boost my returns.
