Don't Do It!

To the best of my knowledge, no one can see, read or otherwise predict the future. So we do the next best thing: study the past to gain a better understanding of where we are headed.

We use a horse's recent track record to determine his odds of winning the next race. We evaluate historical voting records from certain precincts to determine how an upcoming political race might play out. We buy two bags of double-stuff Oreo cookies because we have learned that our spouse will polish off the first bag in less than a day.

When it comes to your mutual funds, though, keep your eyes on the road -- not the rearview mirror.

A trendless trend
First things first: I'm speaking about overall asset allocation, not individual security selection.

Analyzing the returns of, say, a small-cap value fund manager over the past decade can actually provide quite a bit of insight into how well that manager will perform relative to his peers over the next decade.

However, trying to determine how well small-cap value in general will stack up against mid-cap growth or foreign junk bonds is much more of a crapshoot -- there are simply too many variables involved.

Therefore, there is little sense for anyone to overweight their portfolios with whatever asset class happens to be stylish.

From first to worst
It's only natural to be drawn to yesterday's "hottest" funds, particularly when their eye-popping gains are widely trumpeted by mutual fund marketing departments and showcased in mainstream financial publications.

But it's worth asking whether those figures were reflective of the managers' skill, or simply a byproduct of being in the right place at the right time.

According to Morningstar data, roughly 40 funds delivered gains of 50% or better during calendar year 2006. Of those, every single one had the word "China" somewhere in its title.

So, is now the best time to pile into one of those winners? Gartmore China Opportunities 'A,' for instance, rode highfliers like PetroChina (NYSE:PTR) and China Life Insurance (NYSE:LFC) to a sizzling 67% return last year.

Certainly, there are several positive secular trends that could remain in play for years, but before you answer, I would consider a few things.

First, investors will have to shell out a hefty 5.75% upfront sales charge just to get in the door. Furthermore, with a short two-year track record, the fund is still largely untested, and it had a dismal showing in 2005 -- trailing 92% of its peers.

Sure, there might be better alternatives, but even the strongest Pacific Rim fund will have trouble staying on top indefinitely.

Just take a look at this chart (PDF file) from Callan Associates, which ranks investment returns by asset class for each of the past 20 years. A quick glance at the table will reveal two things:

• There is absolutely no way to map out a tactical short-term strategy based on what has already transpired, but ...
• It does seem rather clear that the leaders from one period quite often become laggards during the following, and vice-versa.

Waiting for a sign
At first blush, those two statements might seem contradictory -- just bet big on whatever lost last year.

Here's the problem. There is no way to know how long these "periods" will last. They could end tomorrow, or five years from now, or even a decade from now.

For example, foreign stocks -- as measured by the MSCI EAFE Index -- fell to the bottom of the chart in 1989, 1990, and 1991. After three straight years of dismal performance, many observers probably predicted a sharp rebound in 1992.

Not exactly. Overseas equities tumbled another 12% that year, trailing behind all other asset classes for the fourth straight year. (Of course, just when many left foreign stocks for dead, the group suddenly raced to the top, rallying 32% the following year.)

Similarly, large-cap growth stocks such as eBay (NASDAQ:EBAY), Home Depot (NYSE:HD), and EMC (NYSE:EMC) ruled the roost from 1995 to 1999. However, by 2000, relative valuations had lost their luster, and money began rotating elsewhere. That particular area of the market has been out of favor for the past seven years.

Meanwhile, small-cap value stocks like I2 Technologies (NASDAQ:ITWO) have become all the rage.

At some point, that pattern will likely come to an end -- but, as always, the exact timing of such a reversal is anyone's guess.

When will "then" be "now"?
We all know the markets are cyclical. Unfortunately, that knowledge doesn't do much good unless we know how long the current cycle will last.

Jump in to a beaten-down sector too soon, and you run the risk that it could remain downtrodden for months or years to come. Jump in too late, and you could potentially miss out on all the fun.

Why bother jumping at all?

Rather than try to pinpoint the most opportune time to strike, spread your funds among a well-balanced mix of asset classes, and let the market do its job.

As this table shows, trying to time the markets and load up on a particular sector can take a significant bite out of your returns -- and the difference grows more pronounced over time.

An investor who chases returns and invests $10,000 each January into the top-performing asset class from the prior year has historically lagged a balanced, buy-and-hold strategy by tens of thousands of dollars over the long-haul.

Staying the course
Hindsight can easily be mistaken for insight, so it's easy to assume that whatever is working today -- be it value stocks, emerging markets, REITs, or precious metals -- will continue to work tomorrow.

Unfortunately, that logic just doesn't work well over time (though it would sure make things easier if it did). Certainly, there is nothing wrong with tweaking your asset allocation to take advantage of certain conditions -- such as a booming Chinese economy.

Foolish final thoughts
However, those same conditions can and do change quickly, and going overboard can be the easiest way to wipe out years of portfolio gains.

Here at Motley Fool Rule Your Retirement, we can help keep you take control of your financial future -- or just stay on track, no matter which direction the market takes. Regardless of your risk tolerance, our fine-tuned asset-allocation models can remove all of the guesswork and help you build and maintain the perfect portfolio -- with just the right mix of growth and value, stock and bond, domestic and international.

To check out Rule Your Retirement, just click here and look around free for the next 30 days.

And if you still insist on timing something, why not shoot for an earlier retirement date?

Fool contributor Nathan Slaughter owns shares of eBay, but none of the other companies listed. Home Depot is an Inside Value pick, while eBay is a Stock Advisor selection. The timing is always right for the Fool's disclosure policy.