Balanced Fund Triumphed Over Tactical Asset Allocation

After investors were hurt badly by the loss during financial crisis of 2008, no one wants to go through an experience like that again. This has led to renewed interest in an investing approach called tactical asset allocation.

These tactical strategies have been around for year. The tactical manager or mutual fund retains the flexibility to move quickly among different types of stocks, bonds and cash so the manager can participate in market upswings while avoiding much of the pain on the downside.

Traditional, rock-star fund managers usually claim they can pick the best individual stocks, but tactical managers make a different promise. They are not interested in finding the best individual stock or bond. Instead, they offer some supersecret, black-box algorithm that can analyze macroeconomic forecasts and valuation formulas to identify the ideal time to get in and out of broad asset classes like stocks and bonds. 

This is nothing more than market timing. The problem is, none of us knows exactly when these turning points will happen. Past research shows us that traditional market timing doesn’t work.

To demonstrate whether tactical asset allocation funds were able to deliver on their promise, Morningstar compared the results of 210 tactical asset allocation funds against the performance of a simple default investment choice, the Vanguard Balanced Index Fund (VBINX). This fund has a fixed allocation of 60 percent stocks and 40 percent bonds, and the managers make no attempt to change that allocation based on the direction they think markets are headed.

The study tell us:  “We found that tactical funds generally struggled to deliver competitive risk-adjusted returns when compared with a traditional balanced fund. With a few exceptions, they gained less, were more volatile, or were subject to just as much downside risk as a 60 percent-40 percent mix of U.S. stocks and bonds.”

Here are a few succinct quotes about the value of market timing.

“The only value of stock forecasters is to make fortunetellers look good.” — Warren E. Buffett

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” — Peter Lynch

There will always be this temptation to believe that we can get into an asset class when it’s going up and get out before it heads south. So we have to keep reminding ourselves that, while it’s not impossible, it’s highly improbable we’ll be able to do it successfully over a long investing horizon. Why not just take the simple, balanced choice and get on with your life?