Portfolio considerations

Strategic asset allocation: Why it usually wins out

June 30, 2022

You can’t be right just once with tactical asset allocation
Even if you’re right most of the time, the gain will likely be marginal

Growth of $1,000 based on how successful investors were in anticipating economic surprises

The growth of a hypothetical $1,000 portfolio over 27 years, under five different scenarios:  a baseline portfolio of 60% stocks and 40% bonds that maintains that allocation throughout; a portfolio that accurately anticipates economic surprises all the time; another that gets it right 75% of the time; another 50% of the time; and finally one that never gets it right. All five end up with final balances that are not that different, ranging from $4,695 to $5,237.
But a few days out of the market can be costly

Annualized returns of U.S. stock market from 1928 through 2021

Hypothetical investors would have earned a 6.2% return for all the trading days from 1928 through 2021, a 5% return if they missed the 10 best trading days, a 4.1% return if they missed the 20 best trading days, and a 3.3% return if they missed the 30 best trading days.
Even professional asset managers have challenges timing the market

Distribution of annualized returns

The dispersion of returns of flexible allocation funds versus target allocation funds over 1, 3, 5, and 10 years. Over all four periods, the flexible asset allocation funds had a lower median return and greater dispersion of returns (essentially, more risk) compared with their target allocation peers.
The positive in a market downturn: Higher expected future returns

Annualized 30-year expected returns as of May 31, 2022, relative to year-end 2021

Expected future returns of a portfolio that’s 30% stocks and 70% bonds, a portfolio that’s 60/40, and one that’s 70/30. Returns are shown at the 5th percentile of all simulations, 25th percentile, 50th percentile, 75th percentile, and 95th percentile. In all scenarios, the annualized returns ranged from 3.2% to 8.3%. The heavier the stock allocation, the better the returns.
Strategic asset allocation has endured for a reason
Vanguard Information and Insights

Subscribe to Portfolio considerations.

Get Vanguard news, insights, and timely analysis on the market, delivered straight to your inbox.

Read our privacy policy to learn about how we keep personal information private.

* Indicates a required field

Vanguard Information and Insights

Thank you for subscribing to Portfolio considerations.

You'll be notified when new content is published, but will only ever receive one email a day from Vanguard Insights.

Vanguard logo

Vanguard is the trusted name in investing. Since our founding in 1975, we've put investors first.