Adjusting stock and bond holdings based on moves made by professional money managers diminished portfolio risk by half while dramatically increasing returns over a three-year period, a new study finds.

The study, done by Hepburn Capital Management LLC in Prescott, Ariz., compared its tactical asset allocation model to a buy-and-hold strategy. The study looked at returns from September 2006 through September 2009, when the S&P went through a complete market cycle of six quarters of negative returns and six quarters of positive returns.

Hepburn's "adaptive rebalancing" model adjusted each quarter's stock allocation to the average equity allocation during the previous quarter of the members of the National Association of Active Investment Managers (NAAIM). The percentage not placed in stocks went to bonds. The results were compared to a returns of a buy-and-hold strategy in which the portfolio was rebalanced to a traditional 60/40 mix of stocks and bonds.

Nominal returns increased from a three-year loss of -0.56% for the 60/40 mix to a 9.06% gain for adaptive rebalancing over the three-year period, the study says. On a risk-adjusted basis, the increase in returns was even more striking, the study adds, since virtually every risk measurement--Sharpe Ratio, standard deviation, and even maximum draw-down--showed a dramatically reduced risk of holding stocks using the NAAIM allocation.

"NAAIM members clearly proved their skill by having been progressively more conservative beginning in early 2007, months before the market top of October 9, 2007, became evident to most investors. This can be seen in the steady decline of their stock market exposure during 2007 and 2008," the report says.

"Significantly, the NAAIM allocation technique was profitable in the fourth quarter of 2008 as the stock market was crashing," says Hepburn President Will Hepburn. "Many investors would have loved that performance given the condition of the markets back then."

His adaptive rebalancing strategy is an easy way for financial advisors to dip their toes into active management, he says.