Investing Specialists

How Our Fidelity Bucket Portfolios Have Performed

Christine Benz

The Fidelity of the 1980s and 1990s was all about domestic-stock funds and the rock-star managers who ran them:  Magellan (FMAGX),  Low-Priced Stock (FLPSX),  Dividend Growth (FDGFX), and  Contrafund (FCNTX), to name some of the biggies. Twenty-five years later, several of those funds still boast sterling records and even the same managers.

But other of the firm's U.S. funds grew too big and/or hugged their benchmarks; managers departed and investor preferences evolved. Fidelity's lineup evolved, too. Fixed-income investing emerged as a pocket of strength in the firm's lineup, and the firm's index-tracking products gathered more assets. The firm's recent launch of two new index funds with 0% expense ratios and no minimum initial purchase amounts was as clear an expression as any that the firm doesn't intend to quietly cede market share to Vanguard and BlackRock.

Those developments are good news for investors who use Fidelity funds to populate their portfolios. The firm's fixed-income prowess makes it a particularly appropriate destination for retirees, whose portfolios typically include larger stakes in safe assets than is the case for younger investors.

Now that my Fidelity Bucket portfolios have roughly three years' worth of history, it's an opportune time to check up on what's been working for them, and what hasn't been. I also wanted to conduct a thorough review of the holdings to make sure that they're all well regarded in our analyst ranks.

Bucket Basics
These and all of the other Bucket Portfolios are allocated based on a retiree's anticipated spending. Assets for the next few years' worth of expenditures are parked in cash, while assets that will be used later on step out on the risk spectrum a bit. Within my Bucket framework, I've earmarked assets for another eight years of retirement expenses in bonds, and the remainder in stocks. The retiree won't necessarily tap the assets in precisely that sequence, but the cash and bonds offer a significant bulwark in case a sustained equity market presents itself. In other words, stocks would have to go down and stay down for a decade before for a retiree using my Bucket portfolios would need to sell off beaten-down stocks to meet cash-flow needs. Over rolling 10-year periods, stocks have had a positive return more than 80% of the time.

Yet it's important to note that the percentage allocations laid out in the Bucket Portfolios below won’t necessarily make sense for every retiree. I'm assuming a hypothetical retiree would spend 4% of her portfolio per annum, which explains the 8% cash stake (2 years' worth of portfolio withdrawals). Yet a retiree's actual spending might be higher or lower. For example, a retiree who's spending 3% of her portfolio per year could allocate two years' worth of expenditures 6% of her total portfolio) to cash/Bucket 1, eight years' worth of expenditures (24% of her total portfolio) to bonds/Bucket 2, and the remainder to stocks. Her allocation to conservative investments would be even smaller than what's depicted in my Aggressive portfolio.

For security selection, I relied largely on Medalist-rated funds. This portfolio is geared toward tax-deferred accounts, so I've included ample stakes in tax-inefficient assets--actively managed equity funds and taxable fixed-income funds. I've created separate Bucket Portfolios geared toward Fidelity investors employing taxable accounts.

Aggressive Bucket Portfolio

Bucket 1: Years 1-2
8%: Cash (money market funds and accounts, CDs, checking and savings accounts, and so forth; specific percentages will vary based on the amount of assets and the retiree's spending rate)

Bucket 2: Years 3-10
7%:  Fidelity Short-Term Bond (FSHBX)
20%:  Fidelity Total Bond (FTBFX)
10%: Fidelity Strategic Real Return (FSRRX)

Bucket 3: Years 11 and Beyond
20%:  Fidelity Large Cap Stock (FLCSX)
10%:  Fidelity Total Market Index (FSTVX)
15%:  Fidelity International Discovery (FIGRX)
10%: Fidelity Strategic Income (FADMX)

Performance
3-Year Annualized Return: 6.93%

The U.S. equity market outperformed all major asset classes over the past three years, so it's no surprise that these portfolios' U.S. equity holdings contributed the most to returns over the past three years. Fidelity's ultralow-cost, Gold-rated Total Market Index generated a nearly 16% annualized return over the past three years, the highest of any holding, followed closely by Fidelity Large Cap Stock.

The portfolio's bond holdings generated returns that aligned with their risk levels. With a short duration and a high-quality focus, Fidelity Short-Term Bond barely kept up with cash. Fidelity Strategic Income, meanwhile, which includes junk bonds, floating rate loans, and emerging-markets debt, generated the highest return of any bond fund in the portfolio--not surprising in a "risk-on" market. Both funds have experienced manager changes in the past year, but have retained Silver ratings thanks to their still-experienced management and disciplined processes. Gold-rated Fidelity Total Bond has continued to generate standout returns, landing in the intermediate-term bond group's top 15% over the past three years.

Changes
None, though there are a couple of items worthy of note.

First, a logistical change: The retail, no-load share class of Fidelity Strategic Income is now a share class of Fidelity Strategic Income, thanks to a merger. The ticker is now FADMX.

Second, I considered making a couple of changes to all of the portfolios, but ultimately decided to stand pat with the existing fund choices.

I re-evaluated the portfolios' index fund exposure in the wake of Fidelity's recent launch of two zero-minimum, zero expense ratio funds. Ultimately, however, I decided to stick with Fidelity Total Stock Market Index for a couple of reasons. First, the new index funds are only available on Fidelity's brokerage platform; they can't be accessed otherwise. Second, Fidelity Total Market Index is available for just 0.02% per annum.

In addition, I mulled a change to the portfolio's inflation-protective component. Fidelity Strategic Real Return provides inflation protection through exposure to multiple asset classes: Treasury Inflation-Protected Securities, floating rate loans, commodities and related investments, and real estate debt. I debated whether a swap into a simple inflation-protected bond fund might be simpler, and just as effective. And it would certainly be cheaper: Fidelity Strategic Real Return charges 0.83%, whereas Fidelity Inflation-Protected Bond, an index fund, charges just 0.05%. I decided to stick with Strategic Real Return, largely because I think the multi-asset approach to inflation protection can help reduce the number of moving parts in a portfolio. Investors who would like to lower their portfolios' total costs, however, could reasonably use the TIPS fund instead.

Moderate Bucket Portfolio

Bucket 1: Years 1-2
8%: Cash (money market funds and accounts, CDs, checking and savings accounts, and so forth; specific percentages will vary based on the amount of assets and the retiree's spending rate)

Bucket 2: Years 3-10
7%: Fidelity Short-Term Bond
25%: Fidelity Total Bond
15%: Fidelity Strategic Real Return

Bucket 3: Years 11 and Beyond
15%: Fidelity Large Cap Stock
10%: Fidelity Total Stock Market Index
10%: Fidelity International Discovery
10%: Fidelity Strategic Income

Performance
3-Year Annualized Return: 6.18%

Because of its higher bond stake and lower equity position, this portfolio's return was a bit below the Aggressive portfolio's over the past three years. As with the Aggressive portfolio, the pure large-cap equity holdings (especially Fidelity Total Stock Market Index) contributed the most to performance over the trailing three-year period. Fidelity Strategic Income was the standout on the fixed income side, though the portfolio's largest bond holding, Fidelity Total Bond, also generated fine returns relative to its peers.

Changes
None, though the retail share class for Fidelity Strategic Income is now FADMX.

Conservative Bucket Portfolio

Bucket 1: Years 1-2
8%: Cash (money market funds and accounts, CDs, checking and savings accounts, and so forth; specific percentages will vary based on the amount of assets and the retiree's spending rate)

Bucket 2: Years 3-10
12%: Fidelity Short-Term Bond
30%: Fidelity Total Bond
15%: Fidelity Strategic Real Return

Bucket 3: Years 11 and Beyond
15%: Fidelity Large Cap Stock
10%: Fidelity Total Stock Market Index
5%: Fidelity International Discovery
5%: Fidelity Strategic Income

Performance
3-Year Annualized Return: 5.81%

With just 30% of assets allocated to pure equity funds, this portfolio generated the lowest return of the three Fidelity model portfolios. Fidelity Total Bond, composing nearly a third of assets, generated fine relative returns over the trailing three-year period, but its absolute returns were a less impressive 2.8%.

Changes
None, though the retail share class for Fidelity Strategic Income is now FADMX.

Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.

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