The firms' bond funds are topnotch, but its equity lineup also has some solid options for accumulators.
By Christine Benz | 09-14-15 | 06:00 AM | Email Article

Investing in an IRA or brokerage account? The world is your oyster. You can have your pick among individual stocks, bonds, mutual funds, and exchange-traded funds, and even venture into esoteric assets such as commodities.

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

If you're investing in a company retirement plan, by contrast, you'll usually have to choose among a constrained choice set of investments, often from a single provider. And for years, one of the biggest names in the 401(k) space has been Fidelity Investments. The firm has been jockeying for position with Vanguard for the most 401(k) assets managed (Vanguard eclipsed it last year, according to Bloomberg) but still holds the number-one spot in 401(k) record-keeping. In short, many 401(k) investors have a connection to the Boston-based fund giant.

I've created model portfolios to illustrate how investors who are in accumulation mode can build portfolios using Fidelity funds. Of course, not every fund that I've used in these portfolios will be found on every Fidelity 401(k) menu, but investors can use the general framework to build out their own portfolios.

I've created three Fidelity Retirement Saver portfolios: Aggressive, Moderate, and Conservative. These portfolios are geared toward investors in tax-deferred accounts like IRAs and 401(k)s, meaning that I have selected investments without regard for tax efficiency. I'll introduce tax-efficient versions of these portfolios next week.

As with the other portfolios, I used Morningstar's Lifetime Allocation Indexes to guide the baseline asset allocations. I then relied on Morningstar's medalist ratings to help populate the portfolios, while also consulting with Morningstar senior analyst Katie Reichart, a Fidelity specialist. (Katie provided a first-half update on the goings-on at Fidelity in this video.) I used the share class with the lowest minimum investment amount for these portfolios, but investors who have access to lower-expense share classes should, of course, opt for those instead.

Aggressive Fidelity Retirement Saver Portfolio
Anticipated Time Horizon to Retirement: 40 years

15%: Fidelity Contrafund
15%: Fidelity Value Discovery
15%: Fidelity Spartan Total Market
10%: Fidelity Small Cap Stock
35%: Fidelity International Discovery
5%: Fidelity Total Bond
5%: Fidelity Strategic Real Return

Geared toward a young accumulator, the Aggressive Fidelity Retirement Saver mutual fund portfolio uses the allocations of Morningstar's Lifetime Allocation 2055 Aggressive Index to guide its weightings. That index devotes 90% of its assets to stocks, including a healthy dose of foreign names. Thus, anyone considering such a portfolio should not only have a long time horizon but should also be able to tolerate the volatility that can accompany a very high equity allocation.

Because the equity position is such a large component of the portfolio, I employed several Fidelity equity funds to provide large-cap exposure. However, simplifiers could easily use Fidelity Total Stock Market Index to provide all of their U.S. equity exposure.

The Silver-rated Fidelity Contrafund, a fixture on 401(k) menus for decades, provides large-growth exposure. Despite the fund's girth (over $100 billion and counting, as of September 2015) and hundreds of holdings, Reichart notes that the fund has avoided looking and behaving too much like the market. Fidelity Value Discovery provides value exposure, including a dash of small- and mid-cap stocks. Although manager Sean Gavin is relatively new here, Reichart likes his quality-oriented style, and the fund currently earns a Bronze rating. A total market index fund provides exposure to core-type names not represented in either Contrafund or Value Discovery and helps lower the portfolio's overall costs.

The Bronze-rated Fidelity Small Cap Stock provides exposure to the lower half of the style box. (While Fidelity Small Cap Discovery is a higher-conviction holding, currently earning a Gold rating, it's closed to new investors.) Senior analyst Janet Yang notes that the fund's record has been undistinguished during current manager Lionel Harris' tenure, but she likes its quality-conscious style. As with the Fidelity bucket portfolios for retired investors, I've used Fidelity International Discovery as the sole equity holding. The fund leans toward the growth side of the style box and has historically underperformed in down markets, but that's not a huge concern given the long time horizon for this portfolio. (Indexers could reasonably use Fidelity Spartan Global ex-US Index in lieu of the active fund; Fidelity Spartan International Index would also be reasonable, though it lacks developing-markets exposure.)

The Gold-rated Fidelity Total Bond provides core fixed-income exposure. I've also included a small stake in Fidelity Strategic Real Return, which includes a grab bag of inflation-fighting investments like TIPS, commodities, and floating-rate loans.

Moderate Fidelity Retirement Saver Portfolio
Anticipated Time Horizon to Retirement: 20 years

15%: Fidelity Contrafund
15%: Fidelity Value Discovery
15%: Fidelity Spartan Total Market
10%: Fidelity Small Cap Stock
26%: Fidelity International Discovery
14%: Fidelity Total Bond
5%: Fidelity Strategic Real Return

This portfolio is geared toward a slightly older investor, one who intends to retire in 2035. (Assuming a retirement at age 65, our hypothetical individual would be in his or her 40s today.) But the Moderate portfolio, like the Aggressive version, includes more than 80% in stocks and a still-sizable allocation to foreign names. The key difference in the two portfolios' allocations is that the Moderate portfolio's foreign stake is lower and its core bond position is higher.

As with the Aggressive Saver mutual fund portfolio, I've used Morningstar Lifetime Allocation Indexes to help set the baseline asset allocations. In this case, I used the Moderate version of the 2035 Index.

Conservative Fidelity Retirement Saver Portfolio
Anticipated Time Horizon to Retirement: 5 years

10%: Fidelity Contrafund
10%: Fidelity Value Discovery
10%: Fidelity Spartan Total Market
7%: Fidelity Small Cap Stock
14%: Fidelity International Discovery
7%:  Fidelity Short-Term Bond
30%: Fidelity Total Bond
12%: Fidelity Strategic Real Return

Life-expectancy gains, plus low bond yields, argue for higher equity positions in pre-retiree and retiree portfolios than might have been the case in the past. That's why the Conservative Saver portfolio, geared toward investors with just five years until retirement, maintains a healthy stake in equities, including positions in small-cap and foreign names. For equity exposure, I held on to the same funds employed in the Moderate Saver portfolio, albeit in smaller allocations.

Because the bond piece of this portfolio is larger than is the case with the Moderate Saver portfolio, it's also more diversified. While younger accumulators can get away with a single well-diversified bond fund--say, a core intermediate-term bond fund--people closing in on retirement will want to start diversifying their fixed-income exposure. Thus, I enlarged the position in Fidelity Strategic Real Return and also added a position in short-term bonds. With retirement five years into the future, it's too early to start raising cash for in-retirement living expenses; at today's very low yields, the opportunity cost of doing so is simply too great. But pre-retirees might consider steering part of their fixed-income sleeves to a short-term bond fund that could be readily converted into cash. After all, having sufficient short-term assets in the portfolio can help mitigate sequencing risk--the chance that a retiree could encounter a lousy market right out of the box. Fidelity Short-Term Bond is one of my favorites.

How to Use
As noted above, investors may not have access to all of the funds included in these portfolios. But the key goal here is to depict sound asset-allocation and portfolio-management principles, so investors can readily plug in another fund in the same category if one of the funds I've named here is unavailable.

As with the bucket portfolios, I'll employ a strategic (that is, long-term and hands-off) approach to asset allocation; I'll make changes to the holdings only when individual holdings encounter fundamental problems or changes.

Securities mentioned in this article



Morningstar Rating Morningstar Analyst Report
With Morningstar Analyst reports you can get our expert Buy/Sell opinions on over 3,900 Stock and Funds
Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
Sponsored Links
Sponsor Center
Content Partners