obituaries for ‘strategic asset allocation’ are extremely premature


But if we take stock of the long-term lessons of market history, investors who succumb to this temptation will likely end up making things worse, even if getting nimble with your portfolio seems easy enough. Indeed, it is notoriously difficult to forecast and execute with the precision required to successfully time the markets.

It requires investors to be right on five counts: identify a reliable indicator of future short-term market returns; timing the exit from a specific asset class or market to the specific day; timing re-entry into a specific asset class or market until the specific day; decide on the size of the allocation and how to finance the trade; and execute the transaction at a cost lower than the expected profit.

Not only should investors get it right on the five factors above, they should demonstrate this extraordinary skill repeatedly.

And while there are a handful of experts who can do this, for the vast majority of investors it will certainly be a difficult and ultimately thankless experience. Savvy investor William Bernstein sums it up nicely: “There are two types of investors, whether big or small: those who don’t know where the market is going and those who don’t know they don’t know.”

To underscore this and the modest rewards at stake to try, Vanguard analysis using the MSCI USA Index and Bloomberg US Aggregate Bond data found that if investors successfully anticipate economic surprises 100% of the time, their annualized return over 25 years would only be 0.2 percentage points higher than a traditional balanced portfolio of 60% US stocks and 40% US bonds.

An investor who was right half the time – the equivalent of a coin toss or random luck – would have underperformed the core portfolio.

To better put this in the Australian context, there have been over 13,000 trading days on the ASX from 1972 to 2022. Of these, missing the best 30 trading days would result in a 30% reduction in annualized returns. for a local equity investor. – from 10.8% to 7.3% – over a period of 50 years.

Precise timing almost impossible

To make matters even trickier, nearly half of these best trading days occurred within a week of the market’s worst days. It really drives home that not only is precise timing near impossible, but also that being out of the market at the wrong time will cost you dearly.

So in practice, when it comes to using tactical asset allocation in an effort to time the market, the only winning move for most of us is not to play.

Most of the financial headlines we read rightly focus on the day’s events. But when it comes to your investment portfolio, today is not so important in the context of a 30-40 year investment horizon.

Over your lifetime, it’s the asset allocation decisions you make and stick with that will ensure your investment’s success. Using strategic asset allocation may sound passive and boring, but it works.

Assuming investors already have a diversified portfolio with an asset allocation suited to their own goals, time horizon and risk tolerance, the best course of action at times like these is often confident inaction.


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