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The value of time-varying portfolios

Some investors may benefit from strategic asset-allocation shifts based on changing market and economic conditions.
Commentary by Roger Aliaga-Díaz, Ph.D., Vanguard chief economist, Americas, and head of portfolio construction


As global head of portfolio construction for Vanguard, I think frequently about investors’ long-term success.

At Vanguard, we believe investors should first align portfolios with goals and then “stay the course.” But staying the course can mean different things for different portfolios. Some investors may benefit from strategic shifts in their mix of stocks and bonds, based on changing market and economic conditions.

Such a “time-varying asset allocation” isn’t for everyone, though. It requires comfort with a degree of active risk, specifically model risk, an investor’s willingness to put their faith in our disciplined approach to navigating changing market and economic environments.

Time-varying asset allocation is not market-timing. Asset managers that employ such a tactical approach claim to have superior information, allowing them to outperform everyone else. We don’t make such a claim. We assess public information such as market valuations, or market regimes such as low-yield environments, periods of rising rates, or persistently high inflation.

Our edge is in comparison with static portfolios. Using a systematic process, we adapt asset allocations to changing market conditions that otherwise might put goals at risk and out of reach.

  • Most tactical approaches make short-term bets based on discretionary market calls. Vanguard’s time-varying methodology is model-based, systematic, and repeatable.

  • Our methodology, using Vanguard Capital Markets Model® 10-year forecasts, is based on modest predictability of asset returns over the medium term, in contrast to the short-term nature of most tactical approaches.

  • Our framework carefully discounts model forecast risk by assessing returns through a holistic, distributional approach, not through precise point forecasts.

A candidate for time-varying asset allocation would seek to maintain a target portfolio return or a level of portfolio income over a certain period like five to 10 years. Over such a period, we would expect market factors such as equity valuations and interest rates, or economic forces such as inflation and monetary policy, to cause returns to deviate from historical averages.

In those cases, if the market environment evolves unfavorably, portfolio adjustments may keep goals on track. Our capital markets model evaluates dozens of variables and informs our Vanguard Asset Allocation Model, which systematically builds portfolios with those explicit inputs.

Over a long term, we would expect economic environments and market conditions to eventually revert back to normal and asset returns to converge to their historical patterns, making the more traditional static portfolio approaches more appropriate.

We do recommend that investors leverage professional financial advice in relation to time-varying portfolios. This webpage provides our views on time-varying portfolios in the current context of today’s economic and market conditions.

Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Investors should consult a financial and/or tax advisor for financial and/or tax information applicable to their specific situation.

All investment funds, including those that seek to track an index are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. While the Vanguard ETFs are designed to be as diversified as the original indices they seek to track and can provide greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment.

All monetary figures are expressed in Canadian dollars unless otherwise noted.