How did these perform during the GFC? The results were quite grim.
Source: Zephyr StyleADVISOR
The average of the 2000-2010 vintage lost over 31% of their value. In theory these target date funds were supposed to be suitable for investors near or in retirement.
The 2020 vintage lost over 40% and the 2030 vintage’s loss of 47.7% almost matched the loss on the S&P 500. It took the average 2000-2010 fund three years to recover its losses from the GFC while the 2030 vintage took over five years.
Of course, all of this assumes no money was withdrawn from these investments during the sell-off.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.
Source: Morningstar Direct
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.
This is not to say that no one is trying anything different. The Cerulli Associates study also indicates that financial advisors are adding more alternatives into their portfolios. As Emily Zulz summarized in a recent ThinkAdvisor article, 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.