Subscribe now to find high return investments using ETF trading signals!
Tactical Asset Allocation Plan with ETF Funds - Your 93.6% Investing Solution

Forget trying to pick the next hot stocks to jump start your lagging portfolio returns, its time to get back to basics and think about what asset classes you are holding. Few people understand the power of tactical asset allocation strategies, and most get hung up trying to chase the latest and greatest news stories and stocks, only to get burned and disappointed.  Picking the right stocks only explains 6.3% of a portfolios long term results, so its time to change your mindset on investing if you really want to change your investment performance results.

 

Your Asset Allocation Explains 93.6% of Your Portfolio Return Over the Long-Run

A landmark study by Roger G. Ibbotson and Paul D. Kaplan titled "Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance?" was published in The Financial Analysts Journal in January/February of 2000.  Ibbotson and Kaplan used the 5 asset classes of large-cap US stock, small-cap US stock, non-US stock, US bonds, and cash in their study to examine the 10 year return of 94 US balanced mutual funds versus the corresponding indexed returns.  What their analysis concluded was that asset allocation explains about 93.6% of the variability of a fund’s returns over time, and it also explains 40% of the variation of returns across all funds.  They key point of this article is that the selection and timing of the asset classes included within a portfolio has a much greater influence on results than actual selection of securities.  To illustrate the point, imaging we are at the peak of a bull market, and about to experience a future 50% drop in valuation over the next 12 months.  At that point in time, if we allocate 100% into equities we will experience a 50% drop in valuation over the next 12 months, however if we had allocated 100% into Treasuries or Bonds we would have experienced a positive return.  The timing of when you make asset allocation decisions is also critical to your long run returns.  The use of market timing signals as an input to your asset allocation rebalancing decisions can have a great influence on your overall returns over time.

Asset Allocation Studies Show that Tactical Asset Allocation Works

There are several published studies in financial planning journals that suggest market timing and timing of your asset allocation can have a significant impact on long-term portfolio performance if practiced diligently and regularly.  Here are links to some of these market timing and asset allocation articles, and we encourage you to read them if you are considering your own market timing strategy:

"A Quantitative Approach to Tactical Asset Allocation", Journal of Wealth Management, Feb 2009  concluded that if an investor used a monthly system of market timing with a simple timing indicator that the would have improved their risk-adjusted returns and avoided several devastating bear markets.  The conclusion noted that practicing a monthly asset allocation timing system would gave generated equity like returns, with the volatility and risk of bond volatility.

"Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance?" by Roger G. Ibbotson and Paul D. Kaplan was published in The Financial Analysts Journal in January/February of 2000 and concluded asset allocation accounts for over 90% of the variability of a portfolios return, and 40% of return variations across different fund asset allocation levels.

Benefits of Tactical Asset Allocation and Market Timing Systems

Asset allocation strategies can protect your capital.  Practicing a simple asset allocation system can help preserve your portfolio capital during major market downturns.  Acting on these timing signals and selling into cash or treasuries can preserve a lifetime of gains while you ride out the bear market storm with your holdings in less volatile investments.


Asset allocation can reduce portfolio risk.  Having the ability to avoid or limit exposure to bear markets that plummet 50 - 60% in value over the course of a year can substantially reduce the level of volatility and market risk inside your portfolio over the long term.  


Asset allocation signals can reduce financial worries.  Nothing is more painful that the watching a lifetime of savings disappear.  Market timing signals can help avoid the psychological pain associated with the major erosion of portfolio values

Asset allocation strategies increases consistency of returns over time.  Diligent practice of market timing and asset allocation can help increase the consistency of portfolio returns over time by minimizing the impact of long-term declining markets.   

Asset allocation can be practiced with a wide range of investments.  Popular investment vehicles for market timing include ETFs, mutual funds, index funds, forex, commodities, futures, and stocks.

Asset allocation allows you to capitalize in bull and bear market trends.  With the rise in popularity of many inverse ETF funds you can easily short entire sectors or markets by purchasing an inverse ETF

Asset Allocation Strategies Best Used For Long Term Trends

The best timeframe to utilize market timing asset allocation signals is for intermediate and long-term time frames.  Finding the right balance between effectiveness, usability of a system, and transaction costs makes tactical asset allocation strategies better suited for long term viewpoints.  Catching major bull markets in key sectors, avoiding major bear markets, and keeping transaction costs low is the name of the game for successful long-term tactical asset allocation timing systems.  The average investor will have a very difficult time succeeding at market timing if their trading timeframe is very short.  Transaction costs, the time involved in tracking trades, and taxes will erode your long term gains over time.  Taxes are a major issue to consider carefully, and we recommend that most market timing activities should be reserved for tax-deferred or tax sheltered portfolios.

Tactical Asset Allocation is Ideal for 401Ks, Traditional IRAs and other Tax Sheltered Portfolios

The ability to shift into different asset classes without tax consequences is important if practicing a asset allocation system over a long period of time.  Transaction costs and taxes could easily erode the additional gains made with a tactical timing system, and that is why we do not recommend you use asset allocation timing unless it is in tax sheltered accounts, or only practiced infrequently in regular account to catch or avoid major market moves or corrections.  Luckily, trading transaction costs today are very competitive, and most 401k plans and traditional IRA plans have competitive cost structures and allow infrequent levels of fund switching for free. 

Asset Allocation Fund Strategies Ideal for 401K and Other Employer Sponsored Plans.

Most 401k plans available today offer a varied range of investment options, with usually 7 or more asset categories as selections.  This gives you a great opportunity to allocate your 401k holdings into the top performing assets of your selection choice, and over time keep shifting your selection into the top performing categories.  Most 401k plans offer variations of the following asset classes:

Short term treasuries -  Great for capital preservation during turbulent markets, and easily outperforms in bear markets.  The trick is to know when to get into these funds before a major market meltdown, and when to get back into equities so you don't miss the next market boom.

Bond funds -  most plans have at least 2 types of bond funds.  Knowing when to allocate more or less to this fund during times of interest rate changes and equity market swings is the key to timing it well.

US Large Caps - US Large Capitalization Equities.  Great fund for bull markets to participate in long term gains, and also a solid choice for range-bound trading markets supported by these dividend producing leaders of our US market.

US Small and Midcap Equities - these fund offers a little more volatility along with greater upside potential by investing in smaller companies that may have a stronger growth curve ahead of them.  Time it right and the returns are large, but time it wrong and it will fall harder than the Large Cap Equities.

US Large Cap Growth -  great fund for bull markets to participate in long term gains as these funds capitalize on strong market momentum players, but can also fall harder.

US Large Cap Value - good fund for defensive positioning, and also a solid choice for range-bound trading markets supported by these dividend producing leaders of our US market.

International Fund - International EAFA Index.  International exposure to some of the largest global equities in the world.  More risk in this fund, but potentially more reward.  Important to watch your exposure here over time and be ready to switch out to preserve gains over time.

Tactical Asset Allocation with Your Thrift Savings Plan Account

If you are lucky enough to participate in the Federal Thrift Savings Plan you still have the ability to practice tactical asset allocation with the plans offered.  With only 5 key funds your market timing strategy will be long term in nature, and will likely require fewer trades to still capture (or avoid) major market movements. 

G Fund - Government treasuries fund.  Great for capital preservation during turbulent markets, and easily outperforms in bear markets.  The trick is to know when to get into the G Fund before a major market meltdown, and when to get back into equities so you don't miss the next market boom.

F Fund - Aggregate Bond fund.  Solid bond exposure for your portfolio allocation.  Knowing when to allocate more or less to this fund during times of interest rate changes and equity market swings is the key to timing it well.

C Fund
- US Large Capitalization Equities.  Great fund for bull markets to participate in long term gains, and also a solid choice for range-bound trading markets supported by these dividend producing leaders of our US market.

S Fund - Small and Midcap Equities.  This fund offers a little more volatility along with greater upside potential by investing in smaller companies that may have a stronger growth curve ahead of them.  Time it right and the returns are large, but time it wrong and it will fall harder than the C Fund.

I Fund - International EAFA Index.  International exposure to some of the largest global equities in the world.  More risk in this fund, but potentially more reward.  Important to watch your exposure here over time and be ready to switch out to preserve gains over time.

Asset Allocation Strategies with Self Directed Roth IRA and Traditional IRA plans

With a much wider selection of investment options your greatest risk here is probably over-trading when following a tactical asset allocation timing system, or straying too far into narrow investments and losing sight of diversification.  We recommend the use of Exchange Traded Funds (ETFs) if they are available due to their low cost structure and ability to trade like a stock without restrictions.  Index and sector funds are also a good tool to use with market timing systems and are widely available from most fund companies.  Pay close attention to expense ratios and opt for established index funds with the lowest management fees, and ones that have no upfront or deferred fees.

Asset Allocation Summary and How to Develop Your Own Signals

So what should we conclude about market asset allocation timing strategies?  Let's be clear, tactical asset allocation is no silver bullet that can guarantee any success in the marketplace, just like any other approach to the markets.  But what is becoming clear is that tactical asset allocation can help avoid significant and abnormal downside aberrations in market activity, and this over time is what will get you ahead.  Imagine the value of a portfolio today that simply bought the market index, but was able to avoid the last 3 bear market downturns?  This is where we see the greatest value in applying tactical asset allocation signals to your own portfolio decisions.  The benefits of tactical asset allocation can take many years, but when coupled with smart asset allocation decisions and low cost investments it can be a winning strategy to get ahead.  For more information how you can practice tactical asset allocation read our 7 free but seldom-practiced stock market investing strategies.

 

 
Get the best investment returns by consistently investing in leadership sectors.
Getting the best investment returns starts with signing up now to buy an ETF subcription to get focused and simple ETF advice.