Perspectives : Investment | November 29, 2022

Tactical versus strategic asset allocation

Read time: 12 minutes

Recent volatility in the stock and bond markets has some pundits questioning the wisdom of strategic asset allocation (SAA), in which a portfolio adheres to a prescribed mix of stocks and bonds. Phrases like “the death of 60/40” are catchy and can sound appealing during difficult market environments.

The evidence is clear

But such statements, which tend to promote tactical adjustments to an asset allocation, focus on short-term performance and aren’t supported by research or experience.

In theory, tactically adjusting long-term portfolios, such as target-date funds (TDFs), during periods of market turbulence may seem like a good idea. But in reality, adjusting a portfolio’s asset allocation to enhance returns in the short term is very difficult to get right consistently. Research has repeatedly shown that such moves—which amount to market-timing—are counterproductive over time.

Two approaches to asset allocation

Strategic asset allocation and tactical asset allocation are different methods to maintain a multi-asset portfolio. Strategic asset allocation involves setting target allocations across various asset classes and rebalancing the multi-asset portfolio regularly to stay close to the assigned allocation through all market conditions.

Vanguard Target Retirement Funds employ this strategic approach to bolster financial well-being for those saving for retirement. Our philosophy rests on the evidence that a sound investment strategy starts with an asset mix built on reasonable expectations for risk and return and uses diversified investments to help avoid exposure to unnecessary risks. This strategic approach should remove the temptation to make tactical adjustments when markets are roiling. We believe this is the most prudent way for TDFs to achieve their long-term objective of allowing investors to retire with some assurance of sufficient lifetime income.

In contrast, tactical asset allocation encourages adjustments to a portfolio’s asset mix based on short-term market forecasts. This approach aims to systematically exploit perceived inefficiencies or temporary imbalances in values among different asset or sub-asset classes. It seeks to take advantage of market trends or economic conditions by actively shifting a portfolio’s allocations across or within asset classes.

However, tactical shifts made with the expectation of exploiting short-term market moves is much easier said than done. And importantly, it adds a degree of active management risk. TDFs serve a large and diverse investor population, many of whom are defaulted by retirement plans into TDFs, so we believe it’s important to minimize additional risk wherever possible.

A look at the primary driver of long-term results

Of these two approaches to asset allocation, Vanguard’s Target Retirement series has always emphasized a strategic approach. The primary reason: Research has consistently shown that the mix of assets in broadly diversified portfolios is by far the greatest determinant of both total returns and return variability over the long term. In addition to the seminal research conducted by Brinson, Hood, and Beebower in 1986, Vanguard’s own study, Vanguard’s Framework for Constructing Globally Diversified Portfolios (2021), shows that over time, more than 90% of a portfolio’s return variability can be explained by its SAA. Conversely, short-term tactical investment decisions, such as market-timing and security selection, had relatively little impact on return variability over longer time frames.


To ensure that Vanguard’s latest and best thinking is reflected in our Target Retirement Funds, a comprehensive review of the SAA is conducted annually. During this process, Vanguard’s oversight of its SAA considers new asset classes, currency exposures, home bias, regulatory impacts, investment costs, investor behaviors, and implementation factors, among others. Recommendations to maintain or change the SAA are presented to Vanguard’s Strategic Asset Allocation Committee, which oversees all our multi-asset funds. This committee consists of senior leaders from Vanguard’s investment management and advice businesses and is led by our global chief investment officer and global chief economist. Any changes to the SAA that are approved by our Strategic Asset Allocation Committee must then be approved by the Vanguard Global Investment Committee and Vanguard’s board of directors, both chaired by CEO Tim Buckley, prior to implementation.

Tactical allocation is difficult to get right consistently

Some investment managers, including those of certain competitor TDFs, aren’t completely sold on SAA. They incorporate tactical or dynamic tilts into their asset allocations. These active management approaches may seem like a sensible way to navigate short-term market movements, but it involves an inherent market-timing decision that is difficult to get right consistently.

Here’s why. First, to add value, a tactical approach must overcome implementation costs, including bid/ask spreads, commissions, etc.

Second, because markets can be so unpredictable, relying on specific market signals over short periods of time can be challenging over the long term—which is exactly what TDFs are designed for. And when tactical moves don’t work, the damage can be long-lasting. If investors were out of the stock market for just the best 30 trading days in modern history, they would have missed nearly half the returns over that period (see Figure 1). What’s more, the best days and worst days tend to be very close to one another.

Figure 1: Annualized returns of U.S. stock market from 1928 through 2021

Notes: Returns are based on the daily price return of the S&P 90 Index from January 1928 through March 1957 and the S&P 500 Index thereafter through 2021 as a proxy for the U.S. stock market. The returns do not include reinvested dividends, which would make the figures higher for all bars.

Sources: Vanguard calculations, using data from Macrobond, Inc, as of December 31, 2021.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Consequently, for any tactical move to be successful, managers need to be right not just once but at least five times:

  1. Identify a reliable indicator of short-term future market returns.
  2. Time the exit from an asset class or the market, down to the precise day.
  3. Time reentry to an asset class or the market, down to the precise day.
  4. Decide on the size of the allocation and how to fund the trade.
  5. Execute the trade at a cost (reflecting transaction costs, spreads, and taxes) less than the expected benefit.

Even if a portfolio manager can get these steps right most of the time, the value added over the long term is marginal. Vanguard has conducted research on the incremental benefits of market-timing based on how frequently a hypothetical investor might be successful in anticipating economic surprises. In the hypothetical scenario presented in Figure 2, an investor would have to be correct 75% of the time or better—a very tall order!—to get a return only slightly higher than that of the traditional baseline portfolio of 60% U.S. equities and 40% U.S. fixed income.

Figure 2: Growth of $1,000 based on how successful investors were in anticipating economic surprises

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Notes: The MSCI USA Index and the Bloomberg U.S. Aggregate Bond Index were used as proxies for U.S. stocks and U.S. bonds. The chart represents the growth of hypothetical portfolios with initial balances of $1,000 as of the start of 1992, growing through August 2018. Significant changes in nonfarm payrolls were used as economic surprises. The hypothetical investors would change the asset allocation to either 80% stocks and 20% bonds in anticipation of a positive economic surprise, or to 40% stocks and 60% bonds in anticipation of a negative surprise. Trading costs were not factored into the scenarios; if they had been, the returns of the tactical portfolios would have been lower.

Sources: Vanguard white paper, Here Today, Gone Tomorrow: The Impact of Economic Surprises on Asset Returns, November 2018; Vanguard calculations using data from the U.S. Bureau of Economic Analysis, the U.S. Bureau of Labor Statistics, Bloomberg, and Refinitiv.

The evidence for a strategic approach

Despite all the advantages of having professional asset managers—including analysts, sophisticated computer models that try to predict short-term trends, and other resources beyond those of the average investor—tactical allocation funds have generally posted lower median returns with greater return variation across managers than their counterparts with steadier strategic allocations (see Figure 3).
Figure 3: Distribution of annualized returns
Sources: Vanguard calculations using data from Morningstar, Inc., as of December 31, 2021.
The evidence is clear: Whether looking at short or long time frames, strategic allocation funds have consistently generated higher median returns with less dispersion (less risk) than funds with tactical allocations

The strategic approach remains key to our TDFs

In designing a solution for the wide range of TDF investors, we strongly believe in balancing the risks of investing with return expectations that appropriately compensate for those risks.

While a tactical approach does offer the chance to outperform the market, we consider the typical TDF investor to be averse to relying on higher-risk strategies. Making active bets that don’t work can end up discouraging investors from staying disciplined and riding out the inevitable short-term market declines.

Our ongoing research on retirement investing continues to reaffirm our conviction that tactical shifts in a balanced and diversified portfolio is much less effective in achieving retirement goals than encouraging retirement plan participants to increase their savings rate or extend the date when they plan to retire.

In summary, SAA has endured for a reason. It’s been reaffirmed by academic research and has outlasted numerous bear markets. That’s why the strategic approach remains a key investment principle underlying Vanguard Target Retirement Funds. While participants or plan sponsors may sometimes feel that this approach is overly passive, it’s certainly not laissez-faire.  It has proven to be a reliable driver of long-term return variability and remains as effective as ever in helping investors seek lifelong financial well-being.


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