Alternatives to Market Timing

As hard as it is to time markets consistently well enough to make it worthwhile, we are sympathetic to the idea that there must be a way to mitigate losses, such as the steep, 55% decline in Standard & Poor's 500-stock index between October 2007 and March 2009. The question is whether you can take advantage of timing strategies without betting the farm on all-or-nothing moves into and out of the market. There are several options:

Tactical asset allocation. Asset allocators shift money among stocks, bonds, cash and other investments according to their view of market conditions. They tend to make incremental adjustments rather than all-in or all-out moves. Some base their allocations on moving averages and some on so-called technical indicators. Others use fundamental measures, such as dividend yields and price-earnings ratios. Unfortunately, this strategy is available in just a handful of no-load mutual funds, none with a particularly good track record.

Vanguard Asset Allocation (symbol VAAPX), down 33% in the past year, may be the best of this unimpressive bunch. Its managers use a computer model to gauge potential returns and shift assets among stocks, bonds and cash. The model turned out to be too favorable to stocks last year, but lately it has been working in the fund's favor. At last word, the fund had 90% of its assets in stocks and 10% in bonds. Annual expenses are a low 0.39%.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Small tactical bets. A full-blown tactical asset-allocation strategy is too complicated for the average investor. But you could try a more modest version. Take a small portion of your long-term, buy-and-hold portfolio -- say, 5% to 10% -- and invest it in an asset class or sector that you think has promise over the short run. Shift this portion of your investment when new opportunities arise. For example, a small allocation to gold or a fund that tracks commodity prices might pay off if inflation spikes in the next few years. If you choose wisely, you can boost your overall returns without taking on too much additional risk.

Hedging. Shifting assets can get expensive once you factor in trading costs and taxes. Hedging -- using futures, options or a fund that moves inversely with stock prices -- is one way to keep your long-term asset allocation intact while protecting yourself against short-term peril. This is another strategy that is too complicated for the average investor to pull off. Fortunately, there's a superb mutual fund that will do it for you: Hussman Strategic Growth.

Rebalancing. Although you might not think of it as a timing strategy, rebalancing your portfolio on a regular basis can provide some of the benefits of timing without the risk. For example, let's say your ideal mix is 60% stocks and 40% bonds. If the recent market carnage has left you with a mix that's 45% in stocks and 55% in bonds, you would buy more stocks, sell bonds or combine those actions until your portfolio returned to the 60/40 split.

Rebalancing forces you to go against the grain by selling holdings that are doing relatively well and buying relative laggards. Typically, this involves just a small portion of your portfolio, so you are not taking on outsize risk. Because rebalancing can incur costs, such as trading commissions and income taxes, you don't want to use the strategy more than once or twice a year. Otherwise, try to rebalance within the confines of a tax-deferred account, such as your 401(k) plan. If you are already making regular contributions to a savings or retirement plan, use those additions to maintain your portfolio's ideal mix of assets. Most experts advocate periodic rebalancing, regardless of how they view market timing.