The conclusion from this study would be that most of the effort in portfolio construction and investment policy should be put into determining market exposure and asset allocation rather than asset allocation by itself.
Controlling market exposure would require a form of market timing but, as any honest investment professional will tell you, trying to time the markets over the long run is a futile and sometimes very costly exercise, mainly because of the inherent randomness of markets.
On the other hand, studies have shown that if it were possible to mitigate the degree of drawdowns over the long run, doing so would substantially improve the end performance result.
Since controlling market exposure may require large changes in asset classes, isn't combining asset allocation and market timing a contradiction in terms? Dont you actually substantially change your asset allocation if you fully apply market timing? The answer is yes, but you have to think of the asset allocation element as a sort of structural backbone or foundation of the portfolio. The asset allocation decision is a pure function of the risk profile of the investor. It is the default portfolio exposure when the market conditions are "normal" or when asset classes behave as expected. Market exposure is more of a tactical overlay, its main purpose, at least in this context, is to mitigate the impact of drawdowns. In other words there is no contradiction to speak about when the roles of asset allocation and market exposure are clearly defined.
Coming back to timing markets, it is a futile exercise if human judgement is involved in the decision process. There are certainly ways around this, and if done properly, it can lead to a much better control of performance.
