Quick Asset Allocation Question

[ER Eddie]

Hi, folks. A quick question about asset allocation. Fidelity's analysis of my profile gave me the feedback that my AA was too high for someone my age. It said that most people my age have a more conservative asset allocation, and that I was potentially exposing myself to too much risk.

My AA is 65/35 (65/33/2, to be more exact), with most everything in low-cost index funds. I'm retired completely. I'm 59 years old.

The Fidelity input caught me a little off guard. I wondered, "Am I exposing myself to too much risk? Should I adjust my AA?"

So, I'm just seeking input about that. I believe, in the past, the consensus on this forum has been that any AA between 50/50 and 80/20 is fine, and it doesn't really make a whole lot of difference. So it's possible that the answer to this question is, "It doesn't matter."

I'll add a couple things for context. I am moderate-conservative by nature, including in my dealings with money. I don't need to maximize returns or pile up more money (although my portfolio has been doing very well, and I'm happy about that). I picked 65/35 as a target because 1) I heard John Bogle mention it as working in most cases; 2) it's a halfway point between my waffle range of 60/40 and 70/30, and 3) when I was at 60/40, my CPA told me I was too young to have so much money in bonds (that was two years ago; now apparently I'm too old to have so much money in stocks, lol).

TLDR: Fidelity is telling me 65/35 is too risky for an old coot like me (59). Do you think that's right? Should I be more conservative with my AA?

 

[audreyh1]

If you are happy with 65% equities, then no problem. There is not an one-size-fits-all AA that matches everybody. People have lots of different reasons to select a particular AA. Even very elderly may have a very high equity exposure because they don’t need the money and plan on passing their investments on to heirs.

 

[stepford]

Plenty of folks have equity allocations of 65% and above at your age and older and do just fine. The right number depends on lots of things including other income sources and personal risk tolerance. I'm 60, maintain a 50/50 AA and often feel it's too conservative.

In short - You do you.

 

[pb4uski]

I don't see 65/35 as being imprudent for someone in your circumstances... arguably a hair aggressive but not outrageously so at all.

For comparison, Vanguard's 2025 fund... described as for those 5 years to retirement (which would be typical for a 59 yo) is 59/41... their 2020 fund is 49/51 and their 2030 fund is 67/33.

 

[sengsational]

If you can weather the worst likely or unlikely storm without selling low, then you are probably good. The idea that AA should go linearly towards higher bond allocation as we age is what I consider simplistic thinking; you need to be pulling back before retirement so that a downturn doesn't keep you in the workplace. And for some time after retirement so that a bad spell doesn't decimate the nest egg, but after that, the later years can go back to a reduced bond allocation. All that says it's not linear with age. The reason for the ballast IMO is so you don't need to sell low. If your bond allocation could theoretically carry you 7 or 10 years, that's probably a big enough allocation.


ETA: I'm a similar age and similar AA to you.

 

[OldShooter]

The idea of a one-size-fits-all AA is easily debunked. Fidelity is doing its customers a disservice by perpetuating such a myth. Our AA at 73YO is right for us: 75/25.

The other thing to understand is that volatility is NOT risk. Risk is a stock that goes down in price and stays down, producing losses for the owner. Market volatility is just variations in the steady rise that has been occurring for close to 100 years. ref: https://en.wikipedia.org/wiki/Mr._Market

The place volatility and risk intersect is "Sequence of Returns Risk," fondly known around here as SORR. You can read up on this, but the fix is to hold enough in fixed income that you don't need to sell equities during a down market fluctuation in order to achieve the income you need. I think people around here look at anything from 3 years' spending to even ten as adequate SORR protection.

 

[FREE866]

Think of it this way. You're 59--barring a tragedy , and if you're in decent health you most likely have a 20-30 year investment time horizon. That is a very long time! Age really is just a number.

You have to ask yourself what are your goals and if one of them is growth then a high stock allocation makes perfect sense.





I've found that much of the conventional wisdom of things like "put your age in bonds" and the mindset of "retired people need to be very conservative" might not align with one's goals.

 

[OldShooter]

... You have to ask yourself what are your goals and if one of them is growth then a high stock allocation makes perfect sense. ...

Exactly. Our 75% allocation will almost completely end up in our estate and most will be parceled out into trusts for the grands and DW. This is long-term money, maybe a couple of decades or more.

 

[Ole Red 29]

I am 59, fully retired and have an AA of 75/25. I agree with Sengsational in that as long as your bond allocation can carry you 7+ years, you should be fine in a long stock market turndown. (although there is no guarantee the bond market wouldn't be crashing as well).

There is no right answer, only the one you can live with (sleep at night).

 

[ER Eddie]

If you can weather the worst likely or unlikely storm without selling low, then you are probably good. [....] The reason for the ballast IMO is so you don't need to sell low. If your bond allocation could theoretically carry you 7 or 10 years, that's probably a big enough allocation.

Thanks for the input. You helped to highlight one of the basic purposes of having bonds, which I wasn't focused on. That clarified things. Appreciate it.

I did the math, and (not accounting for inflation), my bonds could cover 20 years of expenses in a down market. So I guess I'm okay.

The place volatility and risk intersect is "Sequence of Returns Risk," fondly known around here as SORR. You can read up on this, but the fix is to hold enough in fixed income that you don't need to sell equities during a down market fluctuation in order to achieve the income you need. I think people around here look at anything from 3 years' spending to even ten as adequate SORR protection.

Yes, I'm new to retirement, so SORR is something I was concerned about, especially back in March when everything was tanking. However, things have been looking up lately (famous last words, heh).

 

[OldShooter]

... I did the math, and (not accounting for inflation), my bonds could cover 20 years of expenses in a down market. So I guess I'm okay. ...

Well, maybe not. Depending on the purpose of your equity tranche, it may be too small. IOW, 65/35 may be too conservative. Or maybe you should be spending some of that fixed income cash on yourself, your kids, on charities, or .. ?? You can fix the ratio by blowing some dough or by buying some equities. IMO 10 years is a very conservative SORR cushion. Dip recovery usuall takes a few years, not twenty. This year it took a few months.

... Yes, I'm new to retirement, so SORR is something I was concerned about, especially back in March when everything was tanking. However, things have been looking up lately (famous last words, heh).

When something exciting happens, remember that investing is a long-term game that requires relentless indifference to Mr. Market's noisy gyrations, up or down. I tell my Adult-Ed investing class students that Rip Van Winkle would have made quite a good investor. Also, repeat after me: "Volatility is not risk."

 

[Koolau]

I don't know your situation or goals, but it's important to know WHAT you are taking whatever risk FOR (whether it is currently too little, too much or just right.)

You take risk to insure you have enough for a 20, 30 or more year retirement. If you already have enough (do your own calculations) then you probably only need to cover inflation possibilities to win the game. I (personally) would advise against taking more risk just to leave more to the kids, for instance.

We're more like 30%/70% though our 70% isn't necessarily bonds (long story.) We believe we've "won" the game, so don't mess it up now!

Whatever you do, don't do it because someone else said "you're doing it wrong." Do whatever you believe most likely meets your needs within your risk tolerance. I like low risk because I hate losing more than I love winning. I don't need any more money unless inflation goes crazy or we both end up in a care facility for 10+ years each. We have (we hope) back-ups in case either of these happen. In any case, good luck and remember that YMMV.

 

[jollystomper]

If you were at 65/35 during the Great Pandemic Meltdown of early last year, and felt fine through it, then there is no need to change.

 

[Koolau]

Thought Experiment: Say you have $1mil and just get by on your SWR of 4% (because you are 65/35 and you are a believer in FIRE "theory.") You are "comfortable" on $40k/year, but you kind of wish you could buy a few toys (maybe a Lexus) and take a couple of cruises a year. That's pretty much the limit of your wish/bucket list. Maybe 2008 or April 2020 spooked you a bit, but you are a believer so you successfully rode it out.

Now, your rich uncle you never knew dies intestate (no that's not the reason he had no children of his own) and his state of residence finds only YOU to give his fortune (after all taxes, fees, etc.) of 100 million dollars. Do you invest all your new found wealth at 65/35 or do you find 400 banks and open FDIC insured accounts to keep the money in while you quadruple your spending and buy 2 Lexus(es) and take 4 cruises?

My point is that there must surely be SOME level of "stash" that means you no longer have to take the "risk" of using equities (or even bonds) to replenish your stash. Yes, there is risk that 400 banks will fail and not be bailed out by the FDIC, but I would think that would be vanishingly small compared to say 1929 redux.

On that basis, my feeling has always been to use the risk you need (and no more) to reach your spending goals. I suggest starting from there and working backward rather than using a set AA or listening to experts tell you what you should have as an AA. YMMV

 

[DayDreaming]

One big factor in your AA decision might be if you're living entirely off your investments, or if you have an additional income stream like a pension.
I'm at 65/35, age 60, and have been living entire off my investments. But this year I start receiving a pretty nice pension, so will be shifting my AA to 70/30, maybe 75/25, maybe even more aggressive eventually.

 

[ER Eddie]

Thanks for the input, folks. I'm reassured that 65/35 is the right AA ratio for me, or good enough, anyhow. It's a nice balance, comes well-recommended, and the discussion about bonds helped me see I have enough there. I'll just ignore the Fidelity robot.

One big factor in your AA decision might be if you're living entirely off your investments, or if you have an additional income stream like a pension.
I'm at 65/35, age 60, and have been living entire off my investments. But this year I start receiving a pretty nice pension, so will be shifting my AA to 70/30, maybe 75/25, maybe even more aggressive eventually.

About two-thirds of my expenses are covered by investment portfolio, and the other third is covered by a small pension. That's been a steady state since I started retirement, so the mix won't really change over time (except for the addition of social security, eventually).

 

[capjak]

It appears you have app 50x expenses in liquid investments. In retirement and at that asset level, I think it might be worth looking at it as expenses rather than an asset allocation.

For example, following Bernstein philosophy, have app >=20x expense in safer assets and the rest invest however you want. If expense is from investments is $50,000 then hold $1,000,000 or at 30x expense have $1,500,000 in safer assets and invest the rest as you feel comfortable.

At lower asset to expense levels there is a need to have higher risk portfolio.

 

[sengsational]

I need to understand why (because I don't), but under the rich uncle scenario, my first thought is that all 100 million would go into equities. Who cares if there's a bumpy road when you pull such a tiny percentage for living? I tried to understand the "you've won, take it all off the table" approach, and I see there may be a few scenarios where it makes sense, but for someone that's got 25 or 30 years left (maybe), it seems like too soon to completely pull back. I also occasionally think that if the markets go south real hard, many of us will be hit very hard, and it will be easier to cut back.

 

[OldShooter]

I need to understand why (because I don't), but under the rich uncle scenario, my first thought is that all 100 million would go into equities. Who cares if there's a bumpy road when you pull such a tiny percentage for living? I tried to understand the "you've won, take it all off the table" approach, and I see there may be a few scenarios where it makes sense, but for someone that's got 25 or 30 years left (maybe), it seems like too soon to completely pull back. I also occasionally think that if the markets go south real hard, many of us will be hit very hard, and it will be easier to cut back.

The example I use in my Adult-Ed investing classes is two 75YO widows in good health whose mother has just died at 95 and who are living on social security. Now imagine that one has $100K and one has $10M. The idea that they should have the same AA is ridiculous.

WRT the $100M that is just a bigger stash where the question must still be "What is the purpose?" If you don't know where you're going, any road will get you there. In our case, the answer would be "We have no purpose for holding that much money, so we'll give almost all of it away." We might give some to friends and family, but family is pretty well handled in our current estate plan. So charity would be the big winner. It makes me smile just to fantasize how much fun it would be to do that.

WRT to the OP's 20 years in fixed income, I still cock my head a little at that, but it is 100% his money and 100% his decision.

 

[youbet]

I'm curious OldShooter, do you teach an Adult-Ed investing class?

 

[OldShooter]

I'm curious OldShooter, do you teach an Adult-Ed investing class?

Yes, it's kind of a pro bono thing for the local school district though I get paid a massive $20/classroom hour. It's 3 sessions x 2 hours, called "Investing for the Long Term" and although it was intended to target twenty-something who don't know what to do with their 401K/403B investments, every class has the full range of ages, twenties through retirement. It's great fun.

 

[pb4uski]

I need to understand why (because I don't), but under the rich uncle scenario, my first thought is that all 100 million would go into equities. Who cares if there's a bumpy road when you pull such a tiny percentage for living? I tried to understand the "you've won, take it all off the table" approach, and I see there may be a few scenarios where it makes sense, but for someone that's got 25 or 30 years left (maybe), it seems like too soon to completely pull back. I also occasionally think that if the markets go south real hard, many of us will be hit very hard, and it will be easier to cut back.

I think it depends on what the objective is. If the objective is to maximize return, then by all means the vast majority would go into equities. OTOH, some people are just more comfortable with stability and are more comfortable with that if they have plenty.

While I concede that for a company that optimizing shareholder return is often job 1, that isn't necessarily job 1 for an individual.

 

[audreyh1]

I need to understand why (because I don't), but under the rich uncle scenario, my first thought is that all 100 million would go into equities. Who cares if there's a bumpy road when you pull such a tiny percentage for living? I tried to understand the "you've won, take it all off the table" approach, and I see there may be a few scenarios where it makes sense, but for someone that's got 25 or 30 years left (maybe), it seems like too soon to completely pull back. I also occasionally think that if the markets go south real hard, many of us will be hit very hard, and it will be easier to cut back.

When someone has way more than enough, 100% equities or 100% fixed income, or anything in between works. It all comes down to personal goals and preferences. There is no “obvious” right answer.

 

[ER Eddie]

I think it depends on what the objective is. If the objective is to maximize return, then by all means the vast majority woud go into equities. OTOH, some people are just more comfortable with stability and are more comfortable with that if they have plenty.

While I concede that for a company that optimizing shareholder return is often job 1, that isn't necessarily job 1 for an individual.

Yeah, that's the case for me. I'm not interested in maximizing my returns. I'm interested in getting decent returns, combined with a very comfortable level of security. Although hypothetically, I could be more aggressive with my AA (go to 80/20, for instance), I just don't want the potential extra money that much. I prefer having an extra layer of security.

 

[Bamaman]

Hi, folks. A quick question about asset allocation. Fidelity's analysis of my profile gave me the feedback that my AA was too high for someone my age. It said that most people my age have a more conservative asset allocation, and that I was potentially exposing myself to too much risk.

My AA is 65/35 (65/33/2, to be more exact), with most everything in low-cost index funds. I'm retired completely. I'm 59 years old.

The Fidelity input caught me a little off guard. I wondered, "Am I exposing myself to too much risk? Should I adjust my AA?"

So, I'm just seeking input about that. I believe, in the past, the consensus on this forum has been that any AA between 50/50 and 80/20 is fine, and it doesn't really make a whole lot of difference. So it's possible that the answer to this question is, "It doesn't matter."

I'll add a couple things for context. I am moderate-conservative by nature, including in my dealings with money. I don't need to maximize returns or pile up more money (although my portfolio has been doing very well, and I'm happy about that). I picked 65/35 as a target because 1) I heard John Bogle mention it as working in most cases; 2) it's a halfway point between my waffle range of 60/40 and 70/30, and 3) when I was at 60/40, my CPA told me I was too young to have so much money in bonds (that was two years ago; now apparently I'm too old to have so much money in stocks, lol).

TLDR: Fidelity is telling me 65/35 is too risky for an old coot like me (59). Do you think that's right? Should I be more conservative with my AA?

Don't feel like the Lone Ranger. I sometimes subscribe to newsletters on Fidelity and follow their suggestions for the best funds at that time. And I've done all right over the years following their learned trade suggestions.

The specific accounts I'm in now have been their best performers for a few years, and I'm mostly on cruise control. I try to keep 5 accounts for simplification, but I've got too much in one account since it's performed so well--grown too much.

And I'm probably too heavy in stocks too.

I sure wish I had a crystal ball in these trying times.