Don’t let this counterintuitive advice shock you: There are some instances when “market timing” works.
The timing trick we’re talking about is properly timing when you make your contributions to your IRA. Why? It’s all about giving your IRA as much time in the market as possible.
This timing strategy is so powerful, that by not using it you’re leaving an average of $14,507 on the table over any 10-year period of investing since 1928.
Too good to be true? Nope. And it’s easy to implement, too.
How IRA “Timing” Works
Each year, everyone has a 15-month window during which you can max out contributions to an IRA. If you save up and max out your IRA contribution at the beginning of the year, instead of the April of the following year, it gives each installment an extra 15 months to grow. Markets go up on average, which means you can expect greater growth with more time in the market.
To test how well an early IRA contribution strategy would have worked throughout history, let’s compare it to the default strategy for most people—waiting until April (tax time) to max out the previous year’s contribution. For those younger than 50, the current IRA contribution limit is $5,500.
First, I made the annual $5,500 investment on April 15, the last possible day to contribute for the prior year—every year for 10 years. I invested it all into the S&P 500 index and measured what the value of the portfolio would have been immediately after the last contribution. I simulated the performance for every 10-year period since 1928.
Second, I did the same thing, but made each annual investment in January, 15 months earlier—the first possible day to contribute for that tax year. For each simulation, I measured the portfolio value on the same day as I did in the first scenario.
On average, investing as early as possible resulted in a $14,507 higher account balance. Considering we’ve invested just $55,000 in both scenarios, that amounts to an additional 26% on the invested principal, as compared to the next-year-at-tax-time strategy.
Below, you can see this historical benefit of giving each of your contributions an extra 15 months in the market. Any extra growth can then compound over the entire life of each annual investment.
Value of Early IRA Contributions
Average gains on ten annual contributions of $5,500
Now, of course, that’s just an average. So let’s look at this “early premium” for each 10-year period individually—the dollar difference between making each contribution as early as possible versus as late as possible.
The graph below shows that you almost always would have won when investing early compared to late. The “early” investors who caught the Great Depression and a combination of the dot-com crash and the 2008 financial crisis did a bit worse, but the downside was at most about $4,000.
Value of Early IRA Contributions by Year
The upside, however, was overwhelming. Sometimes it really paid off to invest early—up to nearly $40,000 more (on just $55,000 of contributions).
Look at that—an investment strategy with huge upside, and a small downside. Now, past performance can never guarantee future results, but nearly 100 years is quite a sample size.
How can you start benefiting from this strategy? Max out your 2015 IRA contributions as soon as possible, and start saving up for your 2016 IRA. When Jan. 2, 2016, rolls around, max out your 2016 IRA.
Why Jan. 2? Even stock markets take New Year’s Day off.
More from Betterment:
- High-Frequency Monitoring: A Short-Sighted Behavior
- Advice for a Market Downturn: Have a Calm Heart and Clear Mind
- Investment Selection: Building Portfolios, One By One
This article originally appeared on Forbes.