"Inappropriate level of risk"

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
lostchild21
Posts: 8
Joined: Tue Jan 19, 2021 1:04 pm

"Inappropriate level of risk"

Post by lostchild21 »

Hi y'all! I am very new to investing, but am 30 years old and started saving late due to school.
I've been reading "The Coffeehouse investor," and read about putting money into index funds then put some of my rollover IRA money into FXAIX (hoping that was an index fund and was correct). I also deposited money into my rollover IRA for 2021 but haven't done anything with it yet (listed as a part of FDRXX?)

I just checked what Fidelity says about my portfolio and under Asset Allocation (55% domestic stock, 16% foreign stock, 6% bonds, 23% short term), it says "The level of stock (equity) in your retirement accounts is generally not associated with someone your age, which may mean an inappropriate level of risk." What does this mean?

Then under Top Positions & Ratings, it says "Great work. Your portfolio doesn't appear to be too heavily weighted in the stocks or bonds of any one company." This is where it lists FDRXX 21%, FXAIX 20%, 3952 16% (idk what this is).

Any advice would be appreciated! I have no idea what I'm doing and want to make sure I have a diverse portfolio to start saving for my future! Thanks!
User avatar
David Jay
Posts: 10139
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: "Inappropriate level of risk"

Post by David Jay »

Welcome to the forum!

Asset allocation (ratio of stocks to fixed income) is a very personal decision, you should probably not listen to anyone who tells you what your asset allocation "should" be.

AA is the primary portfolio "control knob" between growth and stability. Higher percentage of stocks means more potential growth and with more ups-and-downs along the way. Less stocks means a smoother ride but less long term growth. Anything between 90/10 and 50/50 is acceptable if it meets your needs.

For younger people, with a "lifetime" of earnings potential, a higher stock percentage can usually be selected, but you must accept that the ride will be wilder and be prepared to "stay-the-course when the market drops. Selling when the market drops is a portfolio killer, and someone who is fearful should hold a lower percentage of stocks.

I think that Fidelity is probably suggesting that you could hold more than 70% stocks at this point in your life, but I would look inward to see if I can stay the course if the market were to drop 40% (which it probably will do perhaps 3-4-5 times in your investing lifetime).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
alex_686
Posts: 7816
Joined: Mon Feb 09, 2015 2:39 pm

Re: "Inappropriate level of risk"

Post by alex_686 »

Welcome to the forum!

Risk tolerance, and the effect it has on your asset allocations. is both highly important and highly subjective.

This is what I am thinking is happening. The algorithm is tossing your 23% allocated towards short term bonds from your allocation. It is reading this as cash. Maybe it is your emergency fund, maybe it is bucketed for a specific purpose like a car or a down payment for a home. I don't know - but it is getting thrown out.

If that is true - either from the algorithm 's side or from your side - than means your asset allocation is 8% bonds which is light. Maybe. This is a highly debated topic here and elsewhere. However, the algorithm is going to be conservative and will probably start waving a yellow flag around 20% to 10%.

Have you thought about your risk tolerance?

What is your required risk? How much risk must you take to meet your goals?
What is your ability? Could you still hit your goals if there were a steep downturn?
What is your willingness? How would you react to a sharp downturn?

The first 2 can be objectively measured - or at least quantified. The last one is harder.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
User avatar
Sandtrap
Posts: 12779
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona
Contact:

Re: "Inappropriate level of risk"

Post by Sandtrap »

Steps:
1.
Read: Here are links to the wiki's "Getting Started" and "Investing Startup Kit" pages:
https://www.bogleheads.org/wiki/Getting_started
https://www.bogleheads.org/wiki/Bogleh ... rt-up_kit
Define General Investment Goals and Objectives (what is your plan?)
https://www.bogleheads.org/wiki/Invest ... statement
And continue reading links and related topics in the WIKI.

2.
Post for a portfolio review. This format:
Portfolio Review Request
https://www.bogleheads.org/forum/viewt ... =1&t=6212

j :D
Wiki Bogleheads Wiki: Everything You Need to Know
User avatar
4nursebee
Posts: 1670
Joined: Sun Apr 01, 2012 7:56 am
Location: US

Re: "Inappropriate level of risk"

Post by 4nursebee »

lostchild21 wrote: Tue Jan 19, 2021 1:09 pm Hi y'all! I am very new to investing, but am 30 years old and started saving late due to school.
I've been reading "The Coffeehouse investor," and read about putting money into index funds then put some of my rollover IRA money into FXAIX (hoping that was an index fund and was correct). I also deposited money into my rollover IRA for 2021 but haven't done anything with it yet (listed as a part of FDRXX?)

I just checked what Fidelity says about my portfolio and under Asset Allocation (55% domestic stock, 16% foreign stock, 6% bonds, 23% short term), it says "The level of stock (equity) in your retirement accounts is generally not associated with someone your age, which may mean an inappropriate level of risk." What does this mean?

Then under Top Positions & Ratings, it says "Great work. Your portfolio doesn't appear to be too heavily weighted in the stocks or bonds of any one company." This is where it lists FDRXX 21%, FXAIX 20%, 3952 16% (idk what this is).

Any advice would be appreciated! I have no idea what I'm doing and want to make sure I have a diverse portfolio to start saving for my future! Thanks!
What are your goals?
Pale Blue Dot
hi_there
Posts: 476
Joined: Sat Aug 29, 2020 7:00 pm

Re: "Inappropriate level of risk"

Post by hi_there »

I'm not sure what the Inappropriate Risk means. 70% stocks sounds right on target for most 30 year olds. A bit more or less depends on personal risk tolerance. Surely, they must have some description of what "appropriate" would be. Maybe they are just baiting you to call them so they can sell you FA services.

"Great work. Your portfolio doesn't appear to be too heavily weighted in the stocks or bonds of any one company."

This just means that you are diversified within asset classes. This is separate from your stock/bond allocation.
yog
Posts: 250
Joined: Wed Jan 15, 2020 12:57 pm

Re: "Inappropriate level of risk"

Post by yog »

You can see Fidelity's target portfolio allocation by going to the Analysis tab -> selecting Summary View -> Asset Allocation & then selecting the Goal View button. It will show you a donut chart of your current asset allocation, and a recommended target allocation donut chart directly below. Mouse over the components of the donut to see the breakout.

For example, my recommended portfolio in BH terms is 70% equity/30% fixed income. Fidelity breaks this out for me into a target portfolio of 49% domestic stock, 21% international stock, 25% fixed income bonds, and 5% short term liquidity.
User avatar
arcticpineapplecorp.
Posts: 7530
Joined: Tue Mar 06, 2012 9:22 pm

Re: "Inappropriate level of risk"

Post by arcticpineapplecorp. »

make sure your birthdate listed with fidelity is correct.

you'll also know something's wrong if fidelity says you can put $7000 into a Roth IRA this year.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
Doctor Rhythm
Posts: 658
Joined: Mon Jan 22, 2018 3:55 am

Re: "Inappropriate level of risk"

Post by Doctor Rhythm »

OP, these messages reflect the difference between what’s often called market risk versus idiosyncratic risk. The market as a whole can drop (like it did last winter) - that’s the market risk we take by being in the game. Travel-related companies were particularly hard hit because pandemic - that’s the idiosyncratic risk of individual companies and market sectors.

Fidelity’s analysis is saying you aren’t exposed to exposed to excess idiosyncratic risk that comes from being over-concentrated in specific companies or market sectors...so “great work.” This approach is advocated here and easily achieved by using total market index funds.

Market risk can be limited by your asset allocation (% stock versus % bond/cash). The trade off is returns for safety. You can take more risk in hope of better returns, or you can forego some potential returns in exchange for lower risk. I’m guessing that Fidelity is saying your portfolio is more conservative than what they recommend based on the information you provided, such as your age. Maybe true, but your risk tolerance depends on your individual circumstances and personality, so your portfolio might be right for you.
User avatar
grabiner
Advisory Board
Posts: 29155
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: "Inappropriate level of risk"

Post by grabiner »

lostchild21 wrote: Tue Jan 19, 2021 1:09 pm I just checked what Fidelity says about my portfolio and under Asset Allocation (55% domestic stock, 16% foreign stock, 6% bonds, 23% short term), it says "The level of stock (equity) in your retirement accounts is generally not associated with someone your age, which may mean an inappropriate level of risk." What does this mean?
This is a personal decision. Normal recommendations for a 30-year-old investor are 80% stocks or more, because you have a long time to make up for any stock losses. But not all investors can actually handle that level of risk; what did you do with your investments in March 2020? If you weren't comfortable with the stock-market crash then, you might not stick with a stock-heavy portfolio in the next crash.

I am surprised that Fidelity didn't comment on the 23% short-term investments (money-market funds, mostly); this is a lot unless you are saving the money for short-term needs. In a retirement portfolio such as an IRA or 401(k), you would normally hold very little cash until you retire.
Then under Top Positions & Ratings, it says "Great work. Your portfolio doesn't appear to be too heavily weighted in the stocks or bonds of any one company." This is where it lists FDRXX 21%, FXAIX 20%, 3952 16% (idk what this is).
This is saying that you have a diversified portfolio, because of your index funds; some brokerage customers hold a lot in individual stocks, adding risk.
Wiki David Grabiner
drumboy256
Posts: 54
Joined: Sat Jun 06, 2020 2:21 pm

Re: "Inappropriate level of risk"

Post by drumboy256 »

Welcome!

Follow what others have said about reading up on risk and your asset allocation (AA) for your age. For me personally, I’m riding 60 US / 36 Intl. / 4 Bonds.

For reference, my bond allocation is simply from my works fund I have no control over. I also won’t start buying bonds until I reach 50 because I’m ok with taking risk.

Good luck and again welcome!
Promise is one thing. Fulfilling that promise is quite another. - Sir Alex Ferguson
emoore
Posts: 672
Joined: Mon Mar 04, 2013 8:16 pm

Re: "Inappropriate level of risk"

Post by emoore »

Seems like everyone is focusing on an inappropriate amount of risk means too much stock. I think it's the opposite. At 30 I think 23% short term is too much and that why there is too much low risk.
User avatar
Brianmcg321
Posts: 1297
Joined: Mon Jul 15, 2019 8:23 am

Re: "Inappropriate level of risk"

Post by Brianmcg321 »

emoore wrote: Tue Jan 19, 2021 11:11 pm Seems like everyone is focusing on an inappropriate amount of risk means too much stock. I think it's the opposite. At 30 I think 23% short term is too much and that why there is too much low risk.
I agree. OP needs to get out of the short term stuff. Completely unnecessary at 30.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
chassis
Posts: 269
Joined: Tue Mar 24, 2020 4:28 pm

Re: "Inappropriate level of risk"

Post by chassis »

@lostchild21

Welcome!

Bonds don't belong in a portfolio for someone your age. My opinion.

Bill Miller and Ray Dalio have nothing good to say about bonds in this interest rate environment. The opinions of these two gentlemen carry far more weight than mine.

My opinion is that you should as aggressive as you can tolerate, and then a bit more aggressive than that. You will be in the market a solid 30 years, and this is to your advantage. So what if the market draws down multiple times? It will do that during your investing career. And it will come back stronger than before.

I like large cap growth funds.

QQQ
MSEQX
FTEC

Many others.
Dottie57
Posts: 9718
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: "Inappropriate level of risk"

Post by Dottie57 »

At your age, i held 60% stocks and 40% bonds. Why? Because the advisor for my 401k plan suggested that for beginning investors. He also said not to sell when market is down.

I floated around that allocation most of my life. Don’t let an impersonal web app tell you what to do.
Beensabu
Posts: 495
Joined: Sun Aug 14, 2016 3:22 pm

Re: "Inappropriate level of risk"

Post by Beensabu »

lostchild21 wrote: Tue Jan 19, 2021 1:09 pm 3952 16% (idk what this is).
Figure out what this is. You should know that. It might be Fidelity Monthly Income Class P4 (FID3952). If it is, that is probably not what you meant to do since FTSE Canada Universe Bond is the "best fit index" for that.

What fund(s) are you using for your 16% foreign stock? If it's that up there ^^^, that is probably not what you meant to do and the "inappropriate level of risk" bit is coming from you being too bond heavy.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."
Valuethinker
Posts: 42079
Joined: Fri May 11, 2007 11:07 am

Re: "Inappropriate level of risk"

Post by Valuethinker »

Dottie57 wrote: Tue Jan 19, 2021 11:32 pm At your age, i held 60% stocks and 40% bonds. Why? Because the advisor for my 401k plan suggested that for beginning investors. He also said not to sell when market is down.

I floated around that allocation most of my life. Don’t let an impersonal web app tell you what to do.
The empirical evidence is that the performance of this is surprisingly close to 100%, with a lot less volatility. That's the benefit of low correlation between 2 assets in a portfolio.

One thing that might be different in the future is that bond returns are likely to be negative in real terms (given current yields). However that also does not say good things about future stock returns (logically, the market has priced that in by already driving up stock prices, and indeed looking at various valuation metrics, that seems to be true of the US market overall).

There's huge merit in 60/40. That cold feeling when the equity portion of your portfolio has dropped by 50% (or even 35%) in a bear market... it really has to be experienced before you know what your reactions will be. I find as I get closer to retirement I get *more* anxious about volatility not less.

I was lucky, I was out of the country (UK) when the Covid-19 thing first hit markets. The week back (having had to cut our trip short due to closing of borders) was the first week of lockdown so struggling to cope with that, so I never bothered to look at my portfolio. By the time I did, things were starting to recover.
Topic Author
lostchild21
Posts: 8
Joined: Tue Jan 19, 2021 1:04 pm

Re: "Inappropriate level of risk"

Post by lostchild21 »

David Jay wrote: Tue Jan 19, 2021 1:23 pm I think that Fidelity is probably suggesting that you could hold more than 70% stocks at this point in your life, but I would look inward to see if I can stay the course if the market were to drop 40% (which it probably will do perhaps 3-4-5 times in your investing lifetime).
Thank you! I wasn't sure if it meant I should have more or less. I'm ok with the long road and staying put even with the ups and downs.
alex_686 wrote: Tue Jan 19, 2021 1:37 pm Have you thought about your risk tolerance?

What is your required risk? How much risk must you take to meet your goals?
What is your ability? Could you still hit your goals if there were a steep downturn?
What is your willingness? How would you react to a sharp downturn?

The first 2 can be objectively measured - or at least quantified. The last one is harder.
Thank you very much for your reply! I think for now, while I'm still learning, I want to go with the route of keeping it in an index fund long term and I'm definitely okay with not touching it if it takes a downturn, as I understand the market goes up and down but the long run will/should still be a positive.

To respond to some other questions on here, my goals are just to have my money invested for retirement. I have some cash in my bank account so I’m ok with no touching the money in Fidelity until retirement (hopefully).

So domestic and international stock are considered equity, the rest is considered income/cash?

Thanks, @arcticpineapplecorp! I’m only able to put in 6k.

Thanks, @grabiner. March 2020, I only had my 401k investments that were assigned by Fidelity with their guide thing (I have to unsubscribe ASAP). I’d be ok with staying. I don’t plan on touching much of it, I just want it invested (I know it sounds broad, that’s because I still am learning and don’t know the answer to many of these questions!). Could the 23% be the 6k I just put into the IRA that I haven’t put into any stocks yet? I plan to, it’s just sitting there. I am not saving it for any short term needs. I think you’re right on what Fidelity is saying.

I checked and the 6% bonds are from the 401k automatic investments that Fidelity choose (again, will be unsubscribing).

I'm looking into everything discussed here. Prior to about two weeks ago, I only had my 401k stocks which was selected by Fidelity. I put my first 9k in that index fund listed above, and will put my next 6k into something else (I assume that's the 23%?). Anything I'm "not sure of" is because it was some sort of default in my Fidelity account, and I'm just now sifting through everything to try to learn what it is.

**Update** Upon further evaluation, short term is "cash" I have reserve in my HSA and the 6k I just put into my IRA. So I just need to order stock in that money I believe.

Thank you so much to everyone who replied. I truly appreciate it.
pkcrafter
Posts: 14663
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: "Inappropriate level of risk"

Post by pkcrafter »

Information on the Bogleheads 3-fund portfolio. Total stock market is suggested, but using S&P 500 is fine too. Count all accounts marked for retirement as one unified portfolio - 401k, IRA/Roth, etc.

viewtopic.php?f=10&t=88005

Drop the Fidelity advice. You aren't paying for this are you?
I just checked what Fidelity says about my portfolio and under Asset Allocation (55% domestic stock, 16% foreign stock, 6% bonds, 23% short term), it says "The level of stock (equity) in your retirement accounts is generally not associated with someone your age, which may mean an inappropriate level of risk." What does this mean?
I don't know what it means, but asset allocation is your decision. 71% stock is within a reasonable range, but this can be adjusted if you feel it isn't really what you want. It can be difficult to choose a stable allocation when starting out because you don't know how you might react to a severe down market when panic is all around you.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Topic Author
lostchild21
Posts: 8
Joined: Tue Jan 19, 2021 1:04 pm

Re: "Inappropriate level of risk"

Post by lostchild21 »

pkcrafter wrote: Wed Jan 20, 2021 10:47 am Drop the Fidelity advice. You aren't paying for this are you?
I am. Again this was 2-3 years ago when I first started work and had no idea. I literally got to that chapter of the Coffeehouse book and said "Oh crap, that's what I'm doing, gotta cancel!" Calling to cancel today.
alex_686
Posts: 7816
Joined: Mon Feb 09, 2015 2:39 pm

Re: "Inappropriate level of risk"

Post by alex_686 »

Have you taken a look at target date or lifestyle funds? They are a high quality product. They set the asset allocation so you don't have to. Maybe you will get it wrong, maybe you will panic in a crisis, maybe you will forget to rebalance. They do that all for you. The increase in expense ratio is modest, the allocation is generic but it is a good starting point for many investors.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
lostchild21
Posts: 8
Joined: Tue Jan 19, 2021 1:04 pm

Re: "Inappropriate level of risk"

Post by lostchild21 »

alex_686 wrote: Wed Jan 20, 2021 2:56 pm Have you taken a look at target date or lifestyle funds? They are a high quality product.
Interesting. Will look into it. Thank you!
Dr. Dad
Posts: 68
Joined: Fri Jan 01, 2021 2:26 pm

Re: "Inappropriate level of risk"

Post by Dr. Dad »

Does “inappropriate risk” necessarily mean too much risk? Maybe it could mean not enough risk..? 70% stock at your age is arguably not enough. Especially if you want to retire at age 60+ I think one could argue for 80-90% stock at this point—assuming you have no desire or need to touch this part of your portfolio for at least 20-30 years. Just my 2 centavos.

DD
placeholder
Posts: 4392
Joined: Tue Aug 06, 2013 12:43 pm

Re: "Inappropriate level of risk"

Post by placeholder »

lostchild21 wrote: Tue Jan 19, 2021 1:09 pm I also deposited money into my rollover IRA for 2021 but haven't done anything with it yet (listed as a part of FDRXX?)
I assume that your rollover ira is traditional and if so are you able to deduct that 2021 contribution because if no then you should be putting it in roth.
User avatar
dogagility
Posts: 1372
Joined: Fri Feb 24, 2017 6:41 am

Re: "Inappropriate level of risk"

Post by dogagility »

lostchild21 wrote: Wed Jan 20, 2021 7:22 pm
alex_686 wrote: Wed Jan 20, 2021 2:56 pm Have you taken a look at target date or lifestyle funds? They are a high quality product.
Interesting. Will look into it. Thank you!
I would not invest in Fidelity's Freedom Target Date funds. The expense ratios are way too high. Fidelity's Freedom Index fund expense ratios are reasonable and would be OK.

Since you are young, your money is in an IRA, and you state you can ride out the ups and downs of the market, my suggestion would be to invest all (100%; no fixed income) of your tax advantaged retirement account money into two funds at Fidelity: FZROX (total US market index) and FZILX (total international market index).

These "zero" funds have no expenses for the investor. The funds are probably "loss leaders" for Fidelity... so take advantage of this in your IRA.

Investing anywhere between 20-40% of your equity allocation in an international (i.e. non-US) index is generally advised by the forum for diversification purposes. Some people don't invest in any international stock since it has been outperformed by the US market in the past several years (but this may be true going forward).

So, your tax advantaged portfolio investments might look like this: 70% FZROX and 30% FZILX.

Rebalance back to that allocation about once/year.

Done. Simple. Let it ride.
All children spill milk. Learn to smile and wipe it up. -- A Farmer's Wife
Topic Author
lostchild21
Posts: 8
Joined: Tue Jan 19, 2021 1:04 pm

Re: "Inappropriate level of risk"

Post by lostchild21 »

placeholder wrote: Wed Jan 20, 2021 10:22 pm
lostchild21 wrote: Tue Jan 19, 2021 1:09 pm I also deposited money into my rollover IRA for 2021 but haven't done anything with it yet (listed as a part of FDRXX?)
I assume that your rollover ira is traditional and if so are you able to deduct that 2021 contribution because if no then you should be putting it in roth.
I did get a 5498 form for my Rollover IRA in 2020, so I think yes I can deduct!
User avatar
tennisplyr
Posts: 2813
Joined: Tue Jan 28, 2014 1:53 pm
Location: Sarasota, FL

Re: "Inappropriate level of risk"

Post by tennisplyr »

You have a huge asset on your side...time. You're young with lots of time to manage expenses, saving and investing. You really didn't start late, I started at 40 with a family and house to deal with. I've watched our expenses, saved and invested wisely. I'm now approaching 10 years in retirement...I am blessed, life is good!
Those who move forward with a happy spirit will find that things always work out.
placeholder
Posts: 4392
Joined: Tue Aug 06, 2013 12:43 pm

Re: "Inappropriate level of risk"

Post by placeholder »

lostchild21 wrote: Thu Jan 21, 2021 11:42 am
placeholder wrote: Wed Jan 20, 2021 10:22 pm
lostchild21 wrote: Tue Jan 19, 2021 1:09 pm I also deposited money into my rollover IRA for 2021 but haven't done anything with it yet (listed as a part of FDRXX?)
I assume that your rollover ira is traditional and if so are you able to deduct that 2021 contribution because if no then you should be putting it in roth.
I did get a 5498 form for my Rollover IRA in 2020, so I think yes I can deduct!
That just indicates that made a contribution not whether it was deductible which is determined by whether you are covered by a workplace plan combined with your income.
Topic Author
lostchild21
Posts: 8
Joined: Tue Jan 19, 2021 1:04 pm

Re: "Inappropriate level of risk"

Post by lostchild21 »

placeholder wrote: Thu Jan 21, 2021 3:11 pm
lostchild21 wrote: Thu Jan 21, 2021 11:42 am
placeholder wrote: Wed Jan 20, 2021 10:22 pm
lostchild21 wrote: Tue Jan 19, 2021 1:09 pm I also deposited money into my rollover IRA for 2021 but haven't done anything with it yet (listed as a part of FDRXX?)
I assume that your rollover ira is traditional and if so are you able to deduct that 2021 contribution because if no then you should be putting it in roth.
I did get a 5498 form for my Rollover IRA in 2020, so I think yes I can deduct!
That just indicates that made a contribution not whether it was deductible which is determined by whether you are covered by a workplace plan combined with your income.
Oh geese. Thank you! Will look into it.
Post Reply