By Richard Schmitt
NEW YORK (
) -- I started my "rebalancing" trek down Wall Street five years ago and have been rewarded while others have suffered through the ups and down of the market.
Over the past five years, my strategy of rebalancing through 401(k) day trading has allowed me to beat the market.
With all its ups and downs, the market has been mostly sideways for the last 13 years. At April's end, the broad U.S. stock market as measured by the
index, excluding dividends had risen 4.6 percent since its peak in 2000.
So market hitchhikers overloaded with stocks have little to show for their patience and risk tolerance in enduring the treacherous terrain. Those with no plan other than to stay the course may be gasping for thin air at the market's current heights.
Investors should be adhering to an old-fashioned way to make something out of nothing but volatility that Wall Street offered during this period. Knowing that the stock market goes up, down, or sideways every day, I borrowed a chapter from the rebalancing textbook that cherishes market dips and relishes its rises.
Each daily switchback between stock and cash took me on and off the market's beaten path to lock in or set up stock gains whenever the market's terrain shifted.
When I started my rebalancing trek five years ago, I didn't see the twister that would burst Wall Street's bubble within one year, only to subsequently recover lost ground and then some over the next four years.
Rather than bear the substantial risk taken on by the market hitchhikers in for the wild ride, I started in May 2008 with a conservative portfolio evenly balanced between stocks and cash. Then I set out on a course to make timely, incremental switchbacks between stocks and cash to take advantage of the buckling market terrain below.
With my reserves stashed in retirement savings accounts, I was essentially limited to making only one switchback between cash and stock mutual funds each day at the market close. In my so-called "401(k) day trading," my incremental daily fund transfers or "trades" within my retirement savings accounts do not trigger immediate taxes or direct trading costs.
On days when the market is about to close higher, I lock in stock gains by transferring some of my retirement savings from stock to cash. On days when the market is about to close lower, I set up potential future stock gains by transferring some retirement savings from cash to stock.
I determine my single fund exchange that I execute each day just before the market close based on the daily change in a market index, such as the S&P 500 index.
My 401(k) day trading brought me to heights not attained by market hitchhikers bearing more risk. Starting with a retirement savings portfolio evenly balanced between cash and S&P 500 stock funds, 401(k) day trading has yielded a return excluding dividends of 25.4% on invested capital over the five years ended April 30.
By comparison, holding the S&P 500 index returned 15.3% -- again excluding dividends -- during this five-year stretch. The once-a-day switchbacks between stock and cash involved in 401(k) day trading turned into a 10.1 point advantage over staying on the market's course during this five-year period.
401(k) day trading can offer a less risky approach to beat the market by converting market uncertainty into lasting retirement savings gains.
At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Schmitt is an actuary and adjunct professor at the Edward S. Ageno School of Business at Golden Gate University, and author of "401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day."