Of course, all of this assumes no money was withdrawn from these investments during the sell-off. If withdrawals were factored in the time to recovery would be lengthened.
With these kinds of results, one would expect significant changes at the portfolio level, especially for conservative investors.
So how have asset allocations changed or evolved in the last ten years?
They haven’t, really.
The asset allocations are almost identical.
People may be more risk averse now, but this attitude shift isn’t being addressed at the portfolio level.
Investors may have learned the considerable impact of large losses on their lives, but the industry has failed to provide substantial solutions to these concerns.
Alternative Allocations
This is not to say that no one is trying anything different. The Cerulli Associates[4] study also indicates that financial advisors are adding more alternatives into their portfolios. As Emily Zulz summarized in a recent ThinkAdvisor article[5], financial advisors’ average allocations to alternatives rose from 5.7% in 2016 to 7.2% in 2017. This same Cerulli study states that 37% of advisors use liquid alternatives and 40% use some form of non-liquid alts.
But this still leaves about 60% who are not doing anything different from the traditional stock-bond-cash mix.
Moreover, those who do have an allocation to alternatives typically have less than 10% of their portfolio in such investments. For those who are investing in alternatives for capital preservation, 10% is just not enough to make an impact. How much protection can one reasonably expect from alternatives if 90%+ of the portfolio is invested in the same old fashion? For these strategies to make a noticeable impact, they would need 40%, 50%, or more to do the job.
Redefining How We Invest
If traditional asset allocation models failed to adequately protect investors during the Global Financial Crisis, why do so many of today’s portfolios look indistinguishable from those from ten years ago?
Relying on traditional approaches despite their flaws and weaknesses is akin to fiduciary insanity. Doing the same thing over and over and expecting different results may be detrimental to investors’ portfolios and thinking bonds will offer the levels of protection they have historically is unreasonable to assume.
There are more options than ever before for risk management. Utilizing options-based strategies or incorporating hedging strategies into portfolios may help address investor concerns with capital preservation and advisor concerns with meeting clients’ growth needs.
Investor needs shouldn’t be at odds with how their portfolios are constructed. With all the 2008 financial crisis reflections being published, this is a good opportunity to review portfolio models and financial plans and ask: What are you doing differently to meet client needs and concerns?
Marc Odo is the Director of Investment Solutions at Swan Global Investments, a participant in the ETF Strategist Channel.