Markets

Alternatives to Market Timing

Four ways to fiddle without making all-or-nothing bets.

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%.

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.

Most Popular

Will Your Stimulus Check Increase Your Tax on Social Security Benefits?
Coronavirus and Your Money

Will Your Stimulus Check Increase Your Tax on Social Security Benefits?

The answer to this question comes down to whether your stimulus check increases your "provisional income."
March 1, 2021
Third Stimulus Checks Are One Step Closer to Reality – How Much Will You Get?
Coronavirus and Your Money

Third Stimulus Checks Are One Step Closer to Reality – How Much Will You Get?

The House passed President Biden's $1.9 trillion stimulus package. While the bill faces hurdles in the Senate, the provisions authorizing another roun…
February 27, 2021
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021

Recommended

What to Do with a Windfall with Markets at All-Time Highs
investing

What to Do with a Windfall with Markets at All-Time Highs

All at once or a little at a time? Follow this road map to decide how – and when – to invest a large sum.
March 3, 2021
Are You Gambling or Investing? Here’s How to Tell
investing

Are You Gambling or Investing? Here’s How to Tell

Gambling and investing are two very different things, but people sometimes get them mixed up. One’s good for a cheap thrill (if you’re lucky), but the…
March 2, 2021
Do I Have to Pay Taxes on Gains From Stocks?
Becoming an Investor

Do I Have to Pay Taxes on Gains From Stocks?

If you enjoyed stock market success in 2020, you might owe the IRS. Here's our quick, easy guide to paying taxes on your stock gains.
March 1, 2021
ESG Investing: You Can Align Your Investments with Your Values, But Should You?
investing

ESG Investing: You Can Align Your Investments with Your Values, But Should You?

Investing with environmental, social and governance values in mind has gained in popularity, but is it a solid way to grow your wealth?
March 1, 2021