The Tactical Investor

NEW YORK (TheStreet) -- Trying to time purchases or sales of financials like Goldman Sachs(GS Quote) or Citigroup(C Quote) over the last year could have resulted in devastating losses.

Likewise, emerging-market ETFs like Market Vectors Russia(RSX Quote) and iShares FTSE/Xinhua China 25 Index(FXI Quote) have vacillated dramatically during the economic slump and recovery.

Now, more than ever, it is increasingly important to understand the difference between tactical and market timing. While performance chasing and market timing may be tempting, the difficulty of forecasting broad short-term market movements makes that strategy unworkable: Numerous studies have shown that market-timing investors are far more likely to miss out on market gains than they are to avoid market losses.

Tactical allocation, on the other hand, involves making occasional modest tweaks to strategic allocations to adjust for realities and opportunities in the capital markets. For example, stocks historically have outperformed bonds when the economy shows signs of picking up steam, because an accelerating economy makes it easier for corporations to generate profits and cash flow.

Bonds, on the other hand, often suffer when an economy strengthens, because the expanding economy generates inflationary pressures and triggers higher interest rates. Given that backdrop, a tactical investor might want to boost her stock allocation slightly and decrease her bond holdings commensurately.

Tactical allocation assumes that market cycles present opportunities for investors who are observant and disciplined enough to capitalize upon them. The extremely divergent performance of small- and large-cap stocks led to massive valuation discrepancies at the end of the 1990s.