Research: Market Timing vs. Buy and Hold. Who wins?

June, 2022

Tactical asset allocation (TAA) is an investment strategy that gained its original popularity in the 1980s. The financial crisis of 2008 led to another surge in demand for funds using TAA as their strategy. The objective of TAA is to provide better than benchmark returns with (possibly) lower volatility. This would be accomplished by forecasting returns of two or more asset classes and varying the exposure (percent allocation) accordingly.

The varying exposure to various asset classes that tactical asset allocation depends on is based on economic and/or market (technical) indicators. A TAA fund would then be measured against its benchmark. While the benchmark might be 60 percent S&P 500 Index and 40 percent Barclay’s Aggregate Bond Index, the manager might be allowed to have his or her allocations range from 50 percent to 5 percent for equities, 20 percent to 50 percent for bonds, and 0 percent to 45 percent for cash.

In reality, tactical asset allocation is just a fancy name for market timing. In other words, it’s a way to charge higher fees.

Joseph McCarthy and Edward Tower contribute to the literature with their study Static Indexing Beats Tactical Asset Allocation, published in The Journal of Index Investing Spring/Summer 2021. They examined how the returns of tactical asset allocation funds compared with a portfolio of index ETFs having the same investment style and bond- and foreign-market-augmented same-style Fama-French benchmarks. Their data sample covered the period July 2007-June 2020. As of June 2020, Morningstar listed 85 TAA funds.

McCarthy and Tower benchmarked the returns of TAA funds against the Vanguard Total Stock Index ETF (VTI), the Vanguard Total International Stock Market ETF (VXUS), the Vanguard Total Bond Index ETF (BND), and the Vanguard Short-Term Treasury ETF (VGSH). VGSH’s inception was February 2009. Thus, for returns prior to that date, they substituted (VFISX). They also benchmarked returns against the 16 Vanguard ETFs (BND, VB, VBK, VBR, VEU, VGSH, VO, VOE, VOT, VTI, VTV, VUG, VV, VWO, VXF and VYM) with inception dates before 2007 with the best fits as benchmarks. Following is a summary of their findings:

  • TAA funds have higher expense ratios and higher turnover than static index funds.
  • Tactical asset allocation mutual funds and fund-of-fund ETFs substantially under-return static index funds that have the same style.
  • TAA funds typically have higher return fluctuations than do their corresponding benchmarks.
  • Portfolios of equally weighted TAA funds under-returned corresponding portfolios of index ETFs by gaps ranging from 1.77% to 5.15% per year, and corresponding Fama-French benchmarks by gaps ranging from 1.92% per year to 5.08% per year. The underperformance was well in excess of the expense ratios of the TAA funds.
  • Lower expense TAAs had relatively higher returns, but even those with expense ratios less than 0.9% per year had an average alpha of -1.0% per year against the mutual fund benchmarks and -0.5 percent versus the ETF benchmark.
  • The three fund-of-funds TAA ETFs listed by Morningstar under-returned their ETF index benchmarks by between 1.77% per year and 8.98% per year. They under-returned the augmented Fama-French benchmark by a median 5.90% per year.

It is important to note, given the higher turnover of TAA funds and the tax efficiency of ETFs, that the above findings do not even consider the impact of taxes on the returns to taxable investors. Keep these results in mind the next time you are tempted to tactically asset allocate. Bottom line: big fees, poor results. In other words, tactical asset allocation is just another game where the winners are the product purveyors, not the investors.


On September 30, 2011, Vanguard announced that it was closing one of its worst-performing funds, the Vanguard Asset Allocation Fund (VAAPX), firing its adviser, Mellon Capital Management, and transferring the remaining $8.6 billion in assets to another fund, its Balanced Index Fund (VBINX), that follows a passive investment strategy.

Introduced in 1988, the Asset Allocation Fund was free to invest up to 100 percent of its assets in either U.S. stocks, bonds or money market instruments. The fund tactically shifted its asset allocation to take advantage of the “best” opportunities. Unfortunately, the fund underperformed its moderate risk target by almost 3.5 percent a year over its last 10 years. And it lagged 96 percent of its peers over the last five years, and 79 percent over the last decade, while taking more risk.

The failure of the VAAPX to achieve its objective highlights just how difficult it is for active managers to generate alpha after the expenses of the effort. Remember, Vanguard is one of the largest money managers in the world, with huge resources at its disposal. In choosing the manager to advise the fund, you can be sure it employed its deep team of analysts. Yet, they failed to find a manager that would generate future alpha. What advantage do or your financial adviser have over Vanguard that would allow you to believe you are likely to succeed where they failed? Do you have more resources than they do? Are you smarter than they are, or harder working? If you are honest with yourself, the answer should be that you don’t have any advantage, and neither does your adviser, if you have one.


Important Disclosure: This article is for informational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements, or representations whatsoever by us regarding third-party websites. We are not responsible for the content, availability, or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them. Neither the SEC nor any other federal or state agency has approved, confirmed the accuracy, or determined the adequacy of this document The opinions expressed by featured authors are their own and may not accurately reflect those of Collective Advisors LLC.

Collective Wealth AdvisorsAbout the author: Larry Swedroe, Chief Research Officer, Buckingham Wealth Partners As Chief Research Officer, Larry Swedroe has authored or co-authored 16 financial books and devotes all of his time to research and education in the areas of investing, financial planning and behavioral finance. Originally posted TEBI on August 24, 2021