Jun 23, 2022 | EWAN ROSIE

Investment Markets – Stick, or twist?

You may have noticed that investment markets have been volatile lately. Typically, there has been lots of scary headlines in the press around high inflation, poor economic growth outlook, increasing interest rates and the on-going war in Ukraine. And we’re still not clear of COVID!

It’s safe to say, there is a lot going on. Plenty of people like to give their views on what it means for the direction of investment markets. The views that make the most noise are always the negative ones.

At the toughest times, it can be hard to keep faith in your long-term investment strategy. In most other parts of our lives when things are going wrong, we look at what we can change to get us back on track. However, academic evidence tells us this is not the thing to do when it comes to investing.

Tactical asset allocation is when you switch in and out of different asset classes based on your view of the future. It is a market timing strategy and there’s plenty of evidence to show that this does not serve an investor well – SPIVA (Standard & Poors Indices Versus Actives) and Dalbar studies on investor returns are two good examples.

If someone could develop a profitable timing strategy, we would expect to see more investment funds employing it with successful results. But a recent Morningstar report suggests investors should be wary of those claiming to do so. The report examined the results of two types of funds, each holding a mix of stocks (company shares) and bonds:

      • Balanced: Minimal change in allocation to stocks
      • Tactical Asset Allocation: Periodic shifts in allocation to stocks

As a group, funds that sought to enhance results by opportunistically shifting assets between stocks and bonds underperformed funds that simply held a static asset allocation (see the below table). Morningstar further pointed out that if the performance of non-surviving tactical funds were included, the numbers would be even worse. This is called ‘survivorship bias’.

Source: Morningstar, “Tactical Asset Allocation: Don’t try this at home, Sept 2021

Morningstar’s conclusion: “The failure of tactical asset allocation funds suggests investors should not only stay away from funds that follow tactical strategies, but they should also avoid making short-term shifts between asset classes in their own portfolios.”

We should not be surprised by these results. Successful timing requires two correct decisions: when to sell an asset and when to buy it back again. Watching a portfolio fall in value during volatile markets can be uncomfortable. But investors seeking to avoid the pain by temporarily shifting away from their long-term strategy may wind up trading one source of anguish for another.”

It’s important to remember that there are periods of volatility in any long term investment journey. As a thoughtful financial advisor once observed, “A portfolio is like a bar of soap. The more you handle it, the less you have.”

Reference source: Is It Time to Sell Stocks? | Dimensional Fund Advisors


Past performance can’t guarantee what investments will do in the future. The value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in.

This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action.


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