In many situations a single phrase sums up the key to success. In real estate, it’s “location, location, location”. A very versatile maxim can be applied to everything from job opportunities to romantic relationships – “timing is everything”.

But does timing mean everything when it comes to investing? Particularly with the benefit of hindsight, it seems obvious that an investor could significantly increase his returns and reduce his risk by taking advantage of the natural volatility of markets and securities. Buy on the dips and sell on the run-ups – any idiot should be able to do it.

The problem with timing (and a danger of being seduced by hindsight) is that the more decisions that are made in changing a portfolio allocation, the more often those decisions have to be right. Once you sell, how do you decide when to get back in? If the market continues to go up, do you buy in at a higher price, just in time for the market to tank? The risk of being out of the market when it goes up means that timing actually increases portfolio risk over the long term. In practice, market timing has failed in comparison to a steady mix of stocks, bonds and cash based on the investor’s goals and risk tolerance.

This triumph of long-term asset allocation, though, has been due to the last 20 years of prolonged gains in both stocks and bonds (the technology bubble notwithstanding). Some investment professionals are beginning to reconsider market timing as a viable strategy in an environment where stock prices could bounce around for a number of years and the returns between stocks and bonds could narrow. Peter Bernstein, a respected investment strategist, suggested to an industry conference that investors may “need to be more flexible and opportunistic”.

It’s pretty easy to predict what will happen given our addiction to hype. Mr. Bernstein’s comments certainly give market timing a little more legitimacy, and the financial media will seize on successful examples of market timing and make them seem like the norm. After all, long-term asset allocation doesn’t promote increased client activity or new financial product development, so the industry is always looking for something to keep investors confused and looking for help.

Timing market fluctuations within a long-term trend is maddeningly difficult. Any consistent ability to predict the market in the short term would require that all the many market factors, and the relationships between these factors, would have to be similar to past scenarios, and they rarely are. Sure, there are a number of seasonal market swings that “usually” take place, but who wants to bet their financial future on usually.

What is missing from the debate is a discussion of degree and context. Market timing, or at least the recognition that certain asset classes may be over- or undervalued, is not necessarily entirely incompatible with asset allocation. Maintaining an equity allocation over the last four years of boom and bust is not a fatal error, as long as it has been part of an overall allocation. Nor has it been a bad thing to continue a systematic purchase program, as in a 401k. What is dangerous is making disproportionately big bets with any part of your portfolio other than with what is known as “risk capital” – the money you are able to lose.

The best tool to take advantage of market swings is a simple one – historical ratios and averages. The markets have shown a remarkable tendency to return to historical averages over time and have consistently proven the idea of “this time it’s different” to be wishful thinking. When stocks are highly valued by any measure, as they certainly were in 2000, do not commit large amounts of new money to stocks and consider reducing your allocation. When stocks are undervalued by any measure (and stocks never quite went this low, even at the lows of October 2002), do not bail out and consider increasing your allocation. When interest rates are at all-time lows, act accordingly. But always maintain a reasonable balance.

In fact, simply annually rebalancing your portfolio back to a fixed allocation is a form of autopilot market timing. You will always be selling the asset that performed better over the past year and buying the asset that performed worse. If you want to be more aggressive, combine an overall allocation with predetermined ranges of stock and bond exposure; for example, if your long-term target is 60% stocks, allow yourself to have from 50% to 70% stocks depending on the market valuation. Just don’t let “market timing” become the tail that wags the dog.