NEW YORK (TheStreet) -- From mid-September through the end of October, the S&P 500 (SPY) index sank 7.4% and then rebounded back. It almost seemed as if the market was afflicted with the Ebola virus and pre-election jitters but was suddenly cured.
Just as the market bought the story on the way down and sold it on the way up, stock market investors should heed the market's direction to buy low and sell high. This six-week period defines the essence of market volatility. It's an opportunity for savvy investors, or really anyone with retirement savings, to wring returns from market uncertainty.
In periods of market volatility, a form of frequent rebalancing known as 401(k) day trading can help anyone with retirement savings garner better returns through daily fund exchanges that do not trigger immediate taxes or trading costs.
This strategy relies on once-a-day fund exchanges between cash and stock index funds that are valued daily at the market close. Simply buy some stock through a cash-to-stock fund transfer when the market is declining, and sell some stock through a stock-to-cash fund transfer when the market is rising. The amount of each daily fund transfer is determined as a fixed amount per point change in the S&P 500 index.
During the six-week market hiccup that ended Oct. 31, 2014, 401(k) day trading netted a return of 1.4% of invested assets initially split equally between cash and stock funds, or 1 percentage point greater than the market, as measured by the S&P 500 index.
Longer term, 401(k) day trading has yielded a return of more than 13 percentage points greater than the S&P 500 index from Jan. 1, 2000, through Nov. 30, 2014.
Even more impressive, these results demonstrate how daily rebalancing of a diversified retirement savings portfolio can generate better-than-market returns without full exposure to the whims of the market.
On the next page: the Twitter (TWTR) 401(k) day trading challenge.
Increased volatility is a market force and is an opportunity that is here to stay.
Lost in all the hoopla of current market highs are increasingly frequent instances of market palpitations. As reported by John Coates in The New York Times, 76% of the largest one-day percentage moves in the stock market over the last 40 years occurred in the 20 years since 1994.
With the market currently hovering near all-time highs, that next period of market volatility may be just around the corner.
The Challenge: Live on Twitter
For two weeks beginning Dec. 1, 401(k) day trading will endure live, public scrutiny of each underlying daily fund exchange via Tweets each day five minutes before the market close at @401kDayTrading. Each fund exchange between cash and stock funds will be determined as $1,000 for each one-point change in the S&P 500 index, subject to any prior day adjustment for an index change between the time of the transfer and the market close.
During this third annual public trial, investors can see for themselves whether 401(k) day trading in a diversified portfolio of 50% cash and 50% stock index funds will once again yield market-beating returns.