A simple Fidelity passive-index fund portfolio to meet your needs.
Sometimes the easiest investing strategy really is the best. I’m using just three Fidelity index funds to create the easiest investment strategy you’ll ever find.
Not only will this strategy take the guesswork out of investing, it’s also going to protect you from some of the worst investing mistakes. I’ll show you how to find the best Fidelity index funds and how to build your own portfolio.
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Do You Need to Pick Stocks?
Working as an equity analyst, one of the stock market myths I saw first hand was how Wall Street tries to convince investors that you have to be picking stocks. Turn on CNBC or really anything in the financial media and all you’re likely to see a long list of stock recommendations for that day.
But what the pundits and analysts won’t tell you is that’s not the best strategy for 99% of investors out there. It’s great for the pundits and analysts. They collect billions in fees and ad dollars but all that money is just going from your pocket to theirs.
That’s why I wanted to do this video, sharing one of the simplest investing strategies you’ll ever find and the best strategy for anyone that just wants to see their money grow.
Using a Passive Index Fund Portfolio
Now I’ll be using Fidelity index funds through the video but honestly, you can put this strategy together with Vanguard or just about any fund provider. In fact, I’ve got a video on using Vanguard funds that does the same thing but with lower fees.
I’m receiving no compensation from Fidelity or commissions for the video. I just wanted to show you how easy it is to build a solid portfolio of stocks, bonds and real estate for a stress-free investing strategy.
The problem with the whole stock-picking lie Wall Street pulls over on investors is that it just leads to bad investing decisions. You end up jumping in and out of stocks, losing thousands in fees and get nowhere. In fact, Dalbar’s annual study shows the average investor earned just 2.6% annually over the decade to 2013 versus a stock market return of 7.4% and even a 4.6% annualized return in bonds.
What I’m going to show you right now is going to protect you from those bad investing decisions and save you thousands in those stock-picking fees. I’ll first take you through the website for Fidelity funds, show you how to find the best fidelity funds for your portfolio. I’ll then reveal that simple three-fund portfolio and even how to combine it with a little stock-picking for extra returns.
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Finding the Best Fidelity Funds
The fund screener on Fidelity is extremely detailed with over 2,000 ETFs and will actually help you find funds from other companies like Vanguard and iShares as well. It’s almost a little too detailed and you kind of need to know what you’re looking for, what filters you want to use to find a fund, but I’ll take you through a few here.
On the left menu, you’ll find over 100 filters you can use to find funds including filtering by asset class; so stocks, bonds and real estate, filtering funds by sectors or performance and even analyst ratings.
For example if we wanted to find a high yield bond fund, we would toggle Basic ETF Facts and Asset Class here and fixed income. Then we could scroll down to Investment Philosophy and toggle this Passively Managed. That’s going to give us mostly index funds that are going to be a little cheaper compared to actively managed funds. Then down to Fundamentals here and we can filter on this 30-Day SEC yield for funds paying over 3% dividend yield.
That leaves us with 59 funds to choose from and you can get all the data on each through these tabs at the top. If we click on Income Characteristics, we can see the dividend yield. This Performance and Risk tab shows returns as well as some risk measures like Beta. The Analyst Opinions tab here gives you ratings from FactSet, Morningstar and Ned Davis.
Fidelity Funds vs Vanguard
Now I’ll be the first to admit the expense ratios on Fidelity funds surprised me. With most funds from Vanguard and Schwab down to less than a tenth of a percent, I was surprised to see Fidelity charging around three-tenths of a percent on most of its funds.
The difference is in management. While most fund companies have gone to a passive indexing model where their funds follow strict rules for the investments, Fidelity is still largely managing its funds. So when you’ve got that passive indexing strategy, fees are going to be lower because you don’t need as many portfolio managers or analysts. When you’re actively managing your funds, buying and selling to eke out a little higher return, you’ll just naturally have higher costs.
When we look at a comparison of returns between Fidelity funds and others, and this surprised me as well, it looks like that active management is paying off for the company and producing returns that make up for the higher costs.
3 Fidelity Index Funds Portfolio
Now let’s look at that portfolio of Fidelity funds because I think this is the simplest strategy I’ve ever seen, just these three exchange traded funds can take care of all your investments.
First we’ve got the Fidelity High Dividend fund, ticker FDVV, for stock market exposure and a solid 4% dividend yield. That’s more than twice the yield paid on the market and the fund charges a relatively low 0.29% expense ratio.
One of my biggest gripes about index funds, and those of you in the community know this because I complain about it constantly, is what you actually get in a supposedly diversified fund.
For example, a lot of investors just put their money in an S&P 500 fund to get that whole stock market diversification but what they don’t realize is that more than a fifth of their money is in one single sector, technology. In fact, we see in this graphic that just three sectors; IT, health care and financials make up almost half of the S&P fund. Just five of the 11 sectors make up 70% of the fund.
That mean whatever happens in these sectors of the economy is basically your investment. So sectors like technology and consumer discretionary, which are extremely volatile around the economy, are going to make the market fund see those big ups and downs rather than a smoother, safer ride like you’d expect with a diversified fund.
Now the Fidelity fund has it’s own weighting problems with six sectors accounting for most of the fund, but you’ve got different sectors in here than in a market fund. So you’ve got consumer staples, energy and utilities with larger weights.
What you can do, to get a little more diversification and safety, is to split the amount you have in stocks between this dividend fund and maybe a market fund or some other stock fund. That’s going to give you more even exposure to those different sectors but you’ll still get the benefit of high dividends from the Fidelity fund.
Looking at the Fidelity dividend fund versus the SPDR S&P High Dividend fund, ticker SPYD, you see what I was talking about with active versus passive management. The annual fee on the Fidelity fund is 0.23% higher than the SPDR fund but Fidelity has managed to make up for it with a 12% return over the last two years versus 7% on that SPDR fund.
We’ll use the Fidelity MSCI Real Estate Index ETF, ticker FREL, for real estate exposure. The fund charges a 0.08% expense ratio which is about the lowest you’ll find at Fidelity and pays a 4.74% dividend yield.
Now this was really interesting that Fidelity is only charging 0.08% on its real estate fund but fees on all the other funds are still so much higher. It really doesn’t make much sense but I think you’ll start seeing the company lowering fees on other funds as that competition with Vanguard and Schwab heats up.
The Fidelity real estate fund holds shares of 176 companies in that REIT and property space, just about the same as the Vanguard REIT fund we talk about on the channel. I like that even the largest holdings here are less than 5% of the fund so no single company really is going to destroy the returns if something happens.
What really surprised me was the Fidelity fund versus Vanguard on returns. I’ve made the Vanguard fund, ticker VNQ, a regular investment on the channel and have it in our 2019 Challenge portfolio but the Fidelity fund has actually beaten it pretty soundly over the last two years.
Fidelity Bond Fund
Our third fund is the Fidelity Total Bond ETF, ticker FBND, with a 0.36% expense ratio and a 2.9% dividend yield.
I’m including this one to round out our Fidelity portfolio but this is one where I think you could use a different fund like the Vanguard Long-Term Bond ETF, ticker BLV. There is no reason to pay a 0.36% expense ratio on a bond fund when other funds like that Vanguard one charge just 0.07% and pay comparable dividend yields.
With the Fidelity fund, you do get a nice mix of bonds with just under 40% in super-safe US government bonds and the rest mostly in corporate and mortgage bonds. It really hasn’t helped the fund though with returns similar to other bond funds like the iShares Core US Bond ETF, ticker AGG, both with a 0.8% return over the last two years.
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With just these three Fidelity funds though, you’re getting solid diversification across three asset classes; stocks, bonds and real estate. If you want a little more stock-picking, you can put maybe 70% of your money in these funds and invest the rest in a handful of maybe 10 individual stocks you really like. Don't think you need to pick stocks to reach your investing goals. Sometimes the easiest, passive-index fund portfolio is the best.