A recent Morningstar report looked at fund managers that implement market timing strategies also known as Tactical Strategies. The report examined the results of two types of funds, each holding a mix of stocks and bonds[1]:

  • Balanced: Minimal change in allocation to stocks
  • Tactical Asset Allocation: Periodic shifts in allocation to stocks

As a group, tactical funds that sought to enhance results by shifting assets between stocks and fixed income underperformed funds that simply held a relatively static mix. Morningstar also pointed out that if the performance of non-surviving tactical funds were included, the numbers would be even worse. The conclusion: “The failure of tactical asset allocation funds suggests investors should not only stay away from funds that follow tactical strategies, but they should also avoid making short-term shifts between asset classes in their own portfolios.”[2]

The outcomes are predictable since effective market timing hinges on two accurate judgments: knowing when to reduce stock allocation and when to ramp it up. Investors can be swayed towards a tactical approach after encountering alarming articles or financial broadcasts predicting gloomy market conditions. Such overwhelming influx of dire predictions can be challenging to navigate and the noise can be deafening at times. It might feel momentarily relieving to sell stocks and reduce immediate anxiety, but this relief can swiftly be replaced by the anxiety of potentially missing out on future gains if the market bounces back quickly (see US stock returns after March of 2020). In such tumultuous moments, it’s crucial to stay anchored to your long-term strategy. Deviating from the original plan may lead to significant financial setbacks and set you off course.

[1] Source Morningstar. Morningstar defines Tactical Allocation portfolios as those that “seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions and bond sectors on a frequent basis. To qualify for the tactical allocation category, the fund must have minimum exposures of 10% in bonds and 20% in equity. Next, the fund must historically demonstrate material shifts in sector or regional allocations either through a gradual shift over three years or through a series of material shifts on a quarterly basis. Within a three-year period, typically the average quarterly changes between equity regions and bond sectors exceeds 15% or the difference between the maximum and minimum exposure to a single equity region or bond sector exceeds 50%.”

[2] https://www.morningstar.com/articles/1058700/tactical-asset-allocation-dont-try-this-at-home