Volatile Markets and Managed Portfolios: An Automated Investing Update

The market selloff of March 2020 was arguably the first stress test of robo-investing platforms since their inception roughly 10 years ago. Here’s how automated platforms—and the portfolios of investors who use them—performed during the period.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Volatility: How did automated investing perform in March 2020?
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Key Takeaways

  • Essential Portfolios offer five different model portfolio types for core and ESG portfolios

  • Diversification in portfolios helps limit downside risk

Automated investing has become popular over the last 10 years, and the March 2020 stock market selloff was arguably the first big test case for these vehicles.

Investors in Essential Portfolios—an automated investing offering from TD Ameritrade Investment Management, LLC*—reached out for advice and guidance during the market volatility. Although there were some outflows, which is to be expected during market drops, many investors stayed the course. That helps put to rest some of the early criticism of robo-advisors, which predicted that investors would run for the hills at the first growls from a bear market.

Portfolio Performance as Expected

There are five Essential Portfolios styles available for investors to choose from: conservative, moderate, moderate growth, growth, and aggressive. Within those styles, there are both core portfolios and those with an ESG (environmental, social, governance) emphasis, for a total of 10 model portfolio selections.

Not surprisingly, the conservative portfolios, which have an 80% U.S. and non-U.S. bond allocation, experienced the least losses in the first quarter of 2020, while the aggressive portfolios—which target an allocation of 85% in stocks and 15% in bonds—sustained the most. All the portfolios’ performances fell in the first quarter, but even the aggressive portfolios outperformed a portfolio of stocks alone, which demonstrated the benefits of diversification utilizing bonds.

Bonds did well, but so did high-quality, large-cap stocks, which outperformed small-cap stocks. The main takeaway here is that owning breadth—meaning a diversified basket—helped investors in this market. That’s why most investment pros recommend a diversified portfolio.

How Essential Portfolios Work

When it comes to automated investing, there’s sometimes a bit of a misunderstanding out there. “Automated” doesn’t just mean an algorithm manages money and seeks to time the market. The automated piece is really more about the experience of getting invested and helping investors understand how and why their investment dollars are allocated.

Clients who are just getting started with Essential Portfolios fill out a questionnaire that asks for basic information about their age, why they want to invest, their comfort level with risk, and other questions. Potential clients are then guided to a model portfolio that aligns with their answers. If the client agrees to the recommended model portfolio, they deposit funds into the account and the money is invested.

On the back end of Essential Portfolios, there’s an investment team of knowledgeable humans at TD Ameritrade Investment Management who monitor the portfolios daily and may rebalance or make other incremental allocation shifts based on the market environment to maintain the core orientation. 

For example, at the end of December, the investment team started to take a more defensive position for 2020 across all portfolios, in the wake of the strong market performance of 2019. There was also a lot of rebalancing and other tactical activity during the February and March selloff, which allowed the model portfolios to more fully participate in the recent rebound.

Client Interaction

Engagement with clients is key to helping them navigate bouts of volatility, and it’s common for clients to reach out when market swings widen. TD Ameritrade Investment Management seeks to offer information in different formats, including thought-leadership pieces, quarterly videos, market recaps, and other information. The website is designed to give clients access to tools and resources that appeal to a client’s comfort level.

Investors can also pick up the phone and talk to a Portfolios Specialist. Although Essential Portfolios provides access to automated investing, it also incorporates a strong human element.

During bouts of market volatility, as we saw in February and March, we find that clients want to talk about their short-term performance. After all, watching markets swoon can create a visceral response. Even during these emotional times, it’s good to talk about the reasons you’re investing—often for a long-term goal. Opportunities can appear during selloffs, as historically, markets have tended to recover after significant downturns.

Looking back at the first-quarter selloff, automated investing helped investors stay the course to their long-term objectives. 


Key Takeaways

  • Essential Portfolios offer five different model portfolio types for core and ESG portfolios

  • Diversification in portfolios helps limit downside risk

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