Financial Engines very aggressive recommendation

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Crow Hunter
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Financial Engines very aggressive recommendation

Post by Crow Hunter » Tue Jan 14, 2020 11:48 am

My company recently sent me an email about a new "benefit" they were going to give employees.

They are working with Advised Assets Group, LLC (AAG) via Financial Engines to give all employees a Retirement Evaluation.

They offered a preview of what will be in the packet they were going to be mailing everyone. So I looked.

Their asset allocation recommendation for me, with the assumption that I would be retiring at 65 (46 now) was:

17% Bonds/Cash Equivalent
25% Large Cap Stock
28% Small/Med Cap Stock
30% International

This seems to be significantly more aggressive than I would feel comfortable with. Very strong tilt to Small/Med and lower than I would feel comfortable bond allocation. (Age-30 basically)

Is this an example of the irrational exuberance from the late 90's in action today?

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watchnerd
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Re: Financial Engines very aggressive recommendation

Post by watchnerd » Tue Jan 14, 2020 11:56 am

Crow Hunter wrote:
Tue Jan 14, 2020 11:48 am
My company recently sent me an email about a new "benefit" they were going to give employees.

They are working with Advised Assets Group, LLC (AAG) via Financial Engines to give all employees a Retirement Evaluation.

They offered a preview of what will be in the packet they were going to be mailing everyone. So I looked.

Their asset allocation recommendation for me, with the assumption that I would be retiring at 65 (46 now) was:

17% Bonds/Cash Equivalent
25% Large Cap Stock
28% Small/Med Cap Stock
30% International

This seems to be significantly more aggressive than I would feel comfortable with. Very strong tilt to Small/Med and lower than I would feel comfortable bond allocation. (Age-30 basically)

Is this an example of the irrational exuberance from the late 90's in action today?
Is the only data you gave your age?

Did you take a risk tolerance quiz? Or express target returns per year desired?

Because of low bond yield, some advisors are defaulting to age-20 in bonds, although I haven't seen age-30.

Have you asked them?
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snailderby
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Re: Financial Engines very aggressive recommendation

Post by snailderby » Tue Jan 14, 2020 12:01 pm

For comparison, Fidelity and Vanguard's 2040 target-date funds have 10% and 17% in bonds, respectively. But at the end of the day, you need to pick an asset allocation that you are comfortable with.

MichCPA
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Re: Financial Engines very aggressive recommendation

Post by MichCPA » Tue Jan 14, 2020 12:03 pm

Its not the way I would set it up and is slightly (not in a major way) more aggressive than I would be. The biggest issue I have is going super heavy in small and mid cap.

The fixed income portion of the portfolio on most recommended glide paths doesn't significantly increase until about 50-55.

If you were doing the 100-age thing, that really has fallen out of favor.

Grt2bOutdoors
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Re: Financial Engines very aggressive recommendation

Post by Grt2bOutdoors » Tue Jan 14, 2020 12:06 pm

Crow Hunter wrote:
Tue Jan 14, 2020 11:48 am
My company recently sent me an email about a new "benefit" they were going to give employees.

They are working with Advised Assets Group, LLC (AAG) via Financial Engines to give all employees a Retirement Evaluation.

They offered a preview of what will be in the packet they were going to be mailing everyone. So I looked.

Their asset allocation recommendation for me, with the assumption that I would be retiring at 65 (46 now) was:

17% Bonds/Cash Equivalent
25% Large Cap Stock
28% Small/Med Cap Stock
30% International

This seems to be significantly more aggressive than I would feel comfortable with. Very strong tilt to Small/Med and lower than I would feel comfortable bond allocation. (Age-30 basically)

Is this an example of the irrational exuberance from the late 90's in action today?
No - their recommendations are based upon estimated and historical returns of various asset classes and inflation. They also imo, have this ridiculous thought of what your actual required spending would be when you reach retirement age based on a percentage of your current and future expected working income. Financial Engines then expects you to take the balance of your retirement accounts and immediately convert it into an annuity upon retirement. You should invest based on your risk tolerance, had I taken their suggestion the balance in my account could be a bit higher but the ride would not have been as smooth. You should invest based upon your need, ability and willingness to take the risk they say you should take.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
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Re: Financial Engines very aggressive recommendation

Post by Grt2bOutdoors » Tue Jan 14, 2020 12:08 pm

MichCPA wrote:
Tue Jan 14, 2020 12:03 pm
Its not the way I would set it up and is slightly (not in a major way) more aggressive than I would be. The biggest issue I have is going super heavy in small and mid cap.

The fixed income portion of the portfolio on most recommended glide paths doesn't significantly increase until about 50-55.

If you were doing the 100-age thing, that really has fallen out of favor.
I also hold a tilt to mid and small cap, but I don't believe in marching to the beat of lemmings either. You only recognize the value of something when you don't have it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

livesoft
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Re: Financial Engines very aggressive recommendation

Post by livesoft » Tue Jan 14, 2020 12:16 pm

Age 46 and 17% bonds? You probably need less bonds. :)

My point is that everyone is different. For that age, I used a more aggressive asset allocation, then stopped working full-time at age 50.
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MichCPA
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Re: Financial Engines very aggressive recommendation

Post by MichCPA » Tue Jan 14, 2020 12:17 pm

Grt2bOutdoors wrote:
Tue Jan 14, 2020 12:08 pm
MichCPA wrote:
Tue Jan 14, 2020 12:03 pm
Its not the way I would set it up and is slightly (not in a major way) more aggressive than I would be. The biggest issue I have is going super heavy in small and mid cap.

The fixed income portion of the portfolio on most recommended glide paths doesn't significantly increase until about 50-55.

If you were doing the 100-age thing, that really has fallen out of favor.
I also hold a tilt to mid and small cap, but I don't believe in marching to the beat of lemmings either. You only recognize the value of something when you don't have it.
I understand a tilt, but this is pretty notable. You are taking 17% of the market and weighting it above 83%.

Grt2bOutdoors
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Re: Financial Engines very aggressive recommendation

Post by Grt2bOutdoors » Tue Jan 14, 2020 1:23 pm

MichCPA wrote:
Tue Jan 14, 2020 12:17 pm
Grt2bOutdoors wrote:
Tue Jan 14, 2020 12:08 pm
MichCPA wrote:
Tue Jan 14, 2020 12:03 pm
Its not the way I would set it up and is slightly (not in a major way) more aggressive than I would be. The biggest issue I have is going super heavy in small and mid cap.

The fixed income portion of the portfolio on most recommended glide paths doesn't significantly increase until about 50-55.

If you were doing the 100-age thing, that really has fallen out of favor.
I also hold a tilt to mid and small cap, but I don't believe in marching to the beat of lemmings either. You only recognize the value of something when you don't have it.
I understand a tilt, but this is pretty notable. You are taking 17% of the market and weighting it above 83%.
I agree, it's more aggressive than I prefer. Financial Engines though is using a model that is taking account what the OP wants/needs in terms of annual income at retirement. The projections require the "need" for aggressive/riskier investments to meet that return. As I said earlier, I'm not in total agreement with their methodology but there is a need for those who are uneducated to obtain advice at a cost effective level. Use of a third party like Financial Engines which was associated with Nobel Prize winners in finance/economics provides credibility.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

retiringwhen
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Re: Financial Engines very aggressive recommendation

Post by retiringwhen » Tue Jan 14, 2020 1:33 pm

Crow Hunter wrote:
Tue Jan 14, 2020 11:48 am

17% Bonds/Cash Equivalent
25% Large Cap Stock
28% Small/Med Cap Stock
30% International
I ran my portfolio at just about this level (no more than 15% bonds and a bit less International) from my mid-30s (I was clueless before then) until I turned 50, then began to increase bond allocation. I had a long-term horizon, was not afraid of risk/reward trade-offs and had a good career with decent prospects.

So, no, if you were like me, those recommendation were not out of whack.

BTW, in hind-sight, more bonds and more international would have made the 2000-2009 much more lucrative for me though. I don't regret my choice, I chose what I chose and it performed with the range I expected it would do.

Topic Author
Crow Hunter
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Re: Financial Engines very aggressive recommendation

Post by Crow Hunter » Tue Jan 14, 2020 4:40 pm

I honestly don't know what they are basing their recommendations off of. This was just a snapshot preview of what they were going to be sending me in a packet. They possibly have more information about their assumptions in the packet when I get it.

It wasn't anything I asked for, it is just something my company apparently is offering as a employee benefit.

They only know what I have in my 401k, my current salary and my age. I have never answered any other question from them that I am aware of anyway.

I was just surprised about how large the small/mid tilt was and how low the bond allocation was.

I plan on having a 60/40 allocation when I retire so I have a little formula in my Excel spreadsheet that calculates how close I am to my number and what percentage should be in bonds as I approach that number.

I always thought that a Age-20 bonds allocation was fairly aggressive but based on some of the discussion it sounds like the new paradigm is Age-30 is the new Age-10 and Age-40 would be aggressive.

I invested 100% stock and 50% international up until I joined here. :D

jvini
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Re: Financial Engines very aggressive recommendation

Post by jvini » Tue Jan 14, 2020 4:45 pm

I actually like the portfolio. A little too high on international, but that's subjective. Test it on the portfolio visualizer. It's like a magical wayback machine that lets you see how it performed over a number of years. At 30, I don't think there's a reason to be heavy into bonds at all, and I like the small cap tilt.

inbox788
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Re: Financial Engines very aggressive recommendation

Post by inbox788 » Wed Jan 15, 2020 4:48 am

Crow Hunter wrote:
Tue Jan 14, 2020 4:40 pm
I honestly don't know what they are basing their recommendations off of. This was just a snapshot preview of what they were going to be sending me in a packet. They possibly have more information about their assumptions in the packet when I get it.
I think they're using some statistical or AI model. Depending on what funds you have available, you might find small changes give you very different recommendations of what funds to use. I've had one year age or one minor change all of a sudden including a large percentage of a target date fund or lifestrategy fund in place of large cap or total market and some bond. Still, the AA was adequate and overall recommendation was usually acceptable. I just wasn't going to change up all my funds all around that drastically for small real variances.

As far as glidepath, I don't think it's near a liner formula, but more like the target date funds where up to around age 50 is 90/10 or 80/20 and more sharply glides around retirement.

I don't worry too much about small/mid cap tilt. I think the reason you're seeing so much recommended is that the statistics are similar (average returns and standard deviations) and they're leading to similar near optimal points. It all depends on the timeframes they're looking at for their modeling.

It's not a bad program, but I wouldn't pay for it. I assume it's used mostly as a marketing tool to sell their managed advice service and enough employees sign up to keep them in business and giving everyone else some pretty graphs.

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dogagility
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Re: Financial Engines very aggressive recommendation

Post by dogagility » Wed Jan 15, 2020 5:01 am

I agree with others who have said this isn't an inherently poor asset allocation choice given (lack of) the details provided.
"The stock market is a device for transferring money from the impatient to the patient" -- Warren Buffett

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JoeRetire
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Re: Financial Engines very aggressive recommendation

Post by JoeRetire » Wed Jan 15, 2020 7:16 am

Crow Hunter wrote:
Tue Jan 14, 2020 11:48 am
They offered a preview of what will be in the packet they were going to be mailing everyone. So I looked.

Their asset allocation recommendation for me, with the assumption that I would be retiring at 65 (46 now) was:

17% Bonds/Cash Equivalent
25% Large Cap Stock
28% Small/Med Cap Stock
30% International

This seems to be significantly more aggressive than I would feel comfortable with. Very strong tilt to Small/Med and lower than I would feel comfortable bond allocation. (Age-30 basically)

Is this an example of the irrational exuberance from the late 90's in action today?
No. It's a sample suggestion, not an order.
Read the packet. Work with them to tailor your investments to your personal needs, risk tolerance, and investing style.
Very Stable Genius

tibbitts
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Re: Financial Engines very aggressive recommendation

Post by tibbitts » Wed Jan 15, 2020 7:28 am

Crow Hunter wrote:
Tue Jan 14, 2020 11:48 am
Is this an example of the irrational exuberance from the late 90's in action today?
Probably more the result of ten more years of positive equity return history (since 2009) and historically low bond yields (real and nominal), combined with relative equity valuations in small vs. large and domestic vs. international.

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Rick Ferri
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Re: Financial Engines very aggressive recommendation

Post by Rick Ferri » Wed Jan 15, 2020 7:41 am

I've found the mass customization of computer-derived asset allocation models to be less than useless. These models do not know anything about you except your age. They don't ask how much you have already saved, or how much you spend, or if your spouse works. They don't ask if you are going to inherit money or how much you want to leave to your heirs. They don't ask about your health or the health of your spouse or long-term care needs or if someone in your family has special needs. They don't ask about taxes or your rate, or whether you own a home or rent. And they wrongly assume everyone should reduce their risk as they get older regardless of personal circumstances.

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Re: Financial Engines very aggressive recommendation

Post by RootSki » Wed Jan 15, 2020 8:04 am

I’m 46 and I’ve had access to Financial Engines for a few years. They present me an AA very similar to what you posted.

I carried small cap tilt (.05 er) and some international (.06 er) in my 401k for years. Lately, I feel like International has been a dragging my total returns down. Small cap did ok, but I don’t feel like the performance paid for the small increased costs. In December I decided to simplify & reduce my costs so I moved all of the international into SP500 FXAIX (.015) and Small Cap to Total Bond Market (VBMPX, .0158 er).

I did the same for my wife’s 401k. Very happy with the simplicity.

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Re: Financial Engines very aggressive recommendation

Post by Dottie57 » Wed Jan 15, 2020 8:21 am

Crow Hunter wrote:
Tue Jan 14, 2020 11:48 am
Is this an example of the irrational exuberance from the late 90's in action today?
Irrational exuberance is when people and press believe the stock market will never experience a significant decline and recessions will never occur. I had a just out of college co-worker who believed that soon everything would be free. We would be able to get everything through the internet at no cost. He was serious.

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Re: Financial Engines very aggressive recommendation

Post by sjt » Wed Jan 15, 2020 8:27 am

Here at Megacorp, we have the option of using Financial Engines also - for a fee. We also have access to Target Date funds (fee is less), or the option to select from generic name index funds at a lower fee.

I imagine there is a market for Financial Engines to help folks who have no idea what they are doing. If you are a BH member, chances are you will have enough knowledge / interest / confidence to choose your own funds while enjoying lower expense ratios in a self directed portfolio.
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale

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Brianmcg321
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Re: Financial Engines very aggressive recommendation

Post by Brianmcg321 » Wed Jan 15, 2020 8:29 am

Not really sure what's so aggressive about it. It mimics a lot of "growth" portfolios out there.

Make the us equities a total stock index and you have yourself a Boglehead three fund portfolio.
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Re: Financial Engines very aggressive recommendation

Post by UpperNwGuy » Wed Jan 15, 2020 8:37 am

Brianmcg321 wrote:
Wed Jan 15, 2020 8:29 am
Not really sure what's so aggressive about it. It mimics a lot of "growth" portfolios out there.

Make the us equities a total stock index and you have yourself a Boglehead three fund portfolio.
Age minus 30 in bonds is not aggressive, although I would probably shift to age minus 25 during the critical years leading up to retirement (age 55-65).

As for the stock portion, I would put 20 percent of stocks into international and all the rest into a total stock fund.

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Re: Financial Engines very aggressive recommendation

Post by abuss368 » Wed Jan 15, 2020 8:53 pm

My last firm to to bring in "advisors" which actually felt like salesman. I thought the process was a waste of time but the meeting was mandatory. I was somehow able to get the "advisor" to talk about the markets at the time than my portfolio. Worked well as I did not feel like disclosing anything or wanting any "help".
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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