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Market-Timing Isn't Taboo for All Funds

Since its launch, Thermostat has produced winning results. During the five years ending in June 2008, the fund returned 7.47% annually, outdoing 93% of its competitors in Morningstar's conservative allocation category.

Should you abandon buy-and-hold investing?

Not necessarily. Plenty of studies have shown that efforts to time the markets usually fail. Mark Hulbert, editor of Hulbert Financial Digest, found that 80% of market timers missed the mark. Still, there are a handful of mutual funds that have outdone their competitors by shifting between stocks and fixed income. These funds seem well-suited for the current bear market.

Among the top choices is Vanguard Asset Allocation (VAAPX), which has returned 4.49% annually for the past decade, compared to 2.88% for the S&P 500. Portfolio manager Tom Loeb makes dramatic calls, shifting allocations suddenly. Seeking to own undervalued assets, he often buys bonds when stocks are rising.

With the S&P 500 soaring in 1999, Loeb shifted to holding 60% in fixed income. He missed several months of the bull market, but stayed in the black in 2000, a year when the S&P 500 lost 9.1%. In 2006 and 2007, Loeb had more than 80% in stocks, a move that enabled the fund to outpace most competitors. Then, in March, Vanguard shifted to 100% in stocks. So far the fund appears off the mark. But history shows that Loeb often buys stocks when they are poised to outperform bonds.

"After the fund has shifted to 100% in stocks, the S&P 500 has risen an average of 22% during the next 12 months," says Joe Brennan, a principal at Vanguard Group.

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