There’s a reason why market-timing is difficult. For each tactical move to succeed, investors can’t be right just once. They must be right at least five times:

• Identify a reliable indicator of short-term future market returns.
• Time the exit from an asset class or the market, down to the precise day.
• Time reentry to an asset class or the market, down to the precise day.
• Decide on the size of the allocation and how to fund the trade.
• Execute the trade at a cost (reflecting transaction costs, spreads, and taxes) less than the expected benefit.

Not only would investors have to be right on all five points above, they would have to repeat this success for most of their trades to make an impact.  And the impact would likely be marginal.

The chart below shows that if investors successfully anticipated economic surprises 100% percent of the time, their annualized return over more than 25 years would only be 0.2 percentage point higher than a traditional balanced portfolio of 60% U.S. stocks and 40% U.S. bonds. An investor who was correct half the time—the equivalent of a coin toss or random chance—would have underperformed the base portfolio. An investor who was correct 75% of the time would have a final balance only $252 greater than the base portfolio.

From 1928 through 2021, there were more than 23,300 trading days in the U.S. stock market. Out of those, the 30 best trading days accounted for almost half of the market’s return. Being out of the market at the wrong time is costly. And many of those best trading days were clustered closely with the worst days in the market, making precise timing nearly impossible.

Need further proof on how difficult tactical asset allocation is? The chart below shows the distribution of returns over various periods for tactical asset allocation funds versus strategic asset allocation funds (those in the Morningstar categories of Flexible Allocation Funds and Target Risk Funds, respectively). 

Despite all the advantages of their professional asset managers—armies of analysts, sophisticated computer models, and other resources beyond those of the average investor—tactical allocation funds had a lower median return and a greater distribution of outcomes (in essence, more risk) than their counterparts with strategic allocations.

While the downturn in both stocks and bonds this year has been painful for investors, there is an upside. Lower market valuations mean that future expected returns are higher.

For those who are still in the accumulation phase of their investing life, this is a bonus, as they are buying securities at a lower price.

The concept and practice of the balanced portfolio goes back to the 1920s. It’s even older when you read ancient scripts, for example, the Talmudic instruction to divide assets equally into three buckets (land, business, and reserves). Strategic asset allocation has been bolstered by academic research and has outlasted numerous bear markets.

Assuming investors already have a diversified balanced portfolio appropriate for their goals, time horizon, and risk tolerance, the best action may be inaction.

Of course, there is no one-size-fits-all solution. For investors who choose otherwise, Vanguard research indicates that steps such as changing your savings rate or retirement age will likely have more impact on the bottom line over the long run than making changes to a portfolio’s asset allocation.