QUESTION: The stock money I have in taxable accounts is invested mostly in widely diversified index funds. But for my tax-deferred funds, I'm considering using an investment newsletter's "tactical asset allocation" system, which exploits market trends by moving back and forth between stock and bond mutual funds. Do you think I should go ahead with this plan?

- Bob Macy, Placerville, Calif.

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ANSWER: You know what a euphemism is, right? Nobody "lies" any more; they "misspeak." Companies don't fire employees; they "downsize," or, in a case of even a euphemism having a euphemism, they "rightsize."

Well, in my opinion, tactical asset allocation is nothing more than a euphemism for market timing, the practice of trying to jump into stocks just before they're set to soar, and to bail out before they sink.

The reason some people advocate doing this in tax-deferred (such as a 401k) is simple. In a regular taxable account, you would owe taxes each year on your trading gains. But in a tax-deferred account, you don't pay tax on gains until you withdraw them, which means your money can continue to compound.

That assumes, of course, that you are getting gains, which is hardly a given.

There are hundreds of systems for market timing or, if you prefer, tactical asset allocation. Some move back and forth between stocks and cash, others go from equities to bonds.

Some advisers like to follow relatively simple indicators like the 39-week moving average of stock prices, while others rely on more arcane technical analysis involving trading volume and price patterns to try to predict when prices have topped or bottomed out.

Some may recommend moving all one's assets from stocks to cash or bonds; others may recommend shifting only a portion. Some may even stay within stocks, but switch from sector to sector, moving from tech to financials to energy.

But one way or another, it seems to me, it comes down to market timing, or trying to guess which way stock prices are headed in the short-term. And while these systems may have a certain logic behind them (although some strike me as the financial equivalent of palm reading) and may even work for a short time, as a long-term financial strategy I believe market timing and its variations are a poor way to accumulate wealth.

Aside from the fact that transaction costs can wipe out any gains you do manage to eke out, there's just too big a danger of jumping into an asset class or sector after prices have had a big runup and may be vulnerable to a setback.

I think there's a better, and simpler, way. Drop the "tactical" part and follow the good old strategy of asset allocation - that is, choosing a mix of diversified stock and bond funds that's appropriate given your stomach for risk and the length of time your money will be invested, and then re-balance back to that mix once a year.

This strategy allows you to achieve two important goals.

First, you are hedging risk by always having some of your money in stocks and some in bonds at all times.

Second, by re-balancing every year - that is, bringing your portfolio back to its original proportions by selling some shares where you have gains and plowing the proceeds into investments that have lagged - you are always taking some money out of investments that have been hot lately (and may be due for a setback) and putting some into assets that have been less popular (and may be due to rebound).

I think this simple but disciplined system is much better than trying to predict (i.e., guess) which market sector is going to outperform in the near future. (See the ins and outs of asset allocation, and see an allocation that's right for you.)

That said, if you're still tempted by the idea of following some newsletter writer's whizbang system, the least you can do is research the track records of publications that advocate this sort of thing. One newsletter that does just that is Hulbert Financial Digest, which is written by financial columnist Mark Hulbert and monitors the performance of more than 180 newsletters, including market timers and tactical asset allocators.

Frankly, though, I think you'd be better off saving yourself the time and trouble of following one of these systems and instead building a nice well-rounded portfolio and restoring its proportions once a year.

Sometimes simpler is better, and I think this is one of those cases.

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