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When I launched my model Retirement Bucket and Saver Portfolios in September 2015, the timing looked less than auspicious. Global markets plunged in August and September 2015, a response to China's "Black Monday" and resulting turmoil throughout global stock and bond, commodity, and currency markets.
Further clouding the prospects for U.S. stocks was the fact that they had already rallied strongly for nearly seven years. While equity valuations didn't seem excessively high, nor was there a clear catalyst for further gains.
I wasn't thinking a lot about near-term market conditions when the portfolios launched, because they're designed to be long-term-oriented and strategic. But I'm sure that if you had asked me to hazard a guess about what they might return over the next three years, I'd suggest checking your expectations.
And boy, would I have been wrong. Stocks have defied the naysayers over the past three years, with the S&P 500 returning 16% on an annualized basis over the period. And thanks to that strength, all of my equity-heavy Retirement Saver portfolios, including those from Fidelity, have generated solid gains.
Now that the portfolios have years' worth of history under their belts, it's a good time to check up on their holdings and their performance.
Putting the Portfolios to Work
As with the other portfolios, I used Morningstar's Lifetime Allocation Indexes to guide the asset-class exposures for these Fidelity portfolios. To help populate the portfolios with specific funds and monitor them on an ongoing basis, I leaned on Morningstar's Medalist ratings and input from Morningstar's analyst team.
The portfolios are designed as much for education purposes as they are to be investable. But for those who are interested in investing in them, one logical question would be how they should determine whether to use the Aggressive, Moderate, or Conservative portfolios. The main determinant should be proximity to retirement, but not every young investor should invest very aggressively and older investors needn't maintain conservative portfolios.
When right-sizing their allocations, investors should also take into account risk capacity and the presence of other income sources they'll be able to rely on during retirement. To use a simple example, a 55-year-old investor who doesn't get flustered by short-term volatility and has a pension that will provide all of her in-retirement income needs could reasonably employ the Moderate or even Aggressive versions. Meanwhile, a 30-year-old who's nervous about short-term losses might employ the Moderate portfolio, even though his time horizon is long enough to support a higher equity weighting.
Aggressive Retirement Saver Portfolio for Fidelity Investors
15%: Fidelity Contrafund (FCNTX)
15%: Fidelity Value Discovery (FVDFX)
15%: Fidelity Total Market Index (FSTMX)
10%: Fidelity Small Cap Stock (FSLCX)
35%: Fidelity International Discovery (FIGRX)
5%: Fidelity Total Bond Fund (FTBFX)
5%: Fidelity Strategic Real Return (FSRRX)
3-Year Annualized Return: 10.90%
90% of its assets in equities, the Aggressive portfolio notched the highest gains of the three Fidelity Retirement Saver portfolios. The venerable Fidelity Contrafund was the portfolio's biggest gainer, outperforming the Total Market Index fund thanks to an above-market weighting in the technology sector. The giant fund has also performed well alongside its large-growth competitors, which are similarly tilted toward technology names, thanks to strong stock-picking. Of course, the fund's heavy emphasis on the volatile--and not inexpensive--technology sector also leaves it vulnerable to turmoil there.
The portfolio's other U.S. equity holdings also pitched in strong to decent gains, though it's worth noting that Value Discovery has posted uninspiring results relative to its large-value peers over the past three years. That's disappointing but not unexpected; as analyst Robbie Greengold points out in his latest analysis, the fund has tended to notch its best relative results in challenging market environments.
I made one change to the portfolio and mulled a couple of others but ultimately didn't take action.
First, the change: I dropped Small Cap Stock from the portfolio and redeployed those assets to Fidelity Total Market Index. Fidelity Small Cap Stock underwent a manager change recently, with former manager Lionel Harris handing off lead-management responsibilities to comanager Kip Johann-Berkel. This is Johann-Berkel's first assignment as sole manager, and that lack of experience prompted Morningstar analysts to downgrade Small Cap Stock to Neutral. That doesn't mean they think its performance will be poor, just that they don't have enough information to recommend it at this time. Because Fidelity's other small-cap options are closed to new investors, steering the money toward Fidelity Total Market Index, which includes ample exposure to small- and mid-cap stocks, seemed like a sensible step.
In addition, 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.
Finally, I considered swapping out Fidelity Strategic Real Return in favor of Fidelity Inflation-Protected Bond Index (FSIQX), a dedicated Treasury Inflation-Protected Securities fund. But I'm still attracted to the idea of taking a multi-asset approach to inflation protection, and Strategic Real Return includes TIPS as well as floating rate loans, commodities and related investments, and real estate debt. Investors who would like to lower their portfolios' total costs, however, could reasonably use the TIPS fund instead.
Moderate Retirement Saver Portfolio for Fidelity Investors
15%: Fidelity Contrafund
15%: Fidelity Value Discovery
15%: Fidelity Total Market Index
10%: Fidelity Small Cap Stock
26%: Fidelity International Discovery
14%: Fidelity Total Bond
5%: Fidelity Strategic Real Return
3-Year Annualized Return: 10.51%
Although this portfolio has roughly 80% of equities, versus 90% for its Aggressive counterpart, the Aggressive portfolio has a higher weighting in international stocks, which have underperformed. Thus, the Moderate portfolio has nearly kept pace with the Aggressive one over the past three years. As with the Aggressive portfolio, Contrafund and Total Market Index gave gave returns the biggest boost, whereas gains in Fidelity Total Bond and Strategic Real Return were the most muted.
As with the Aggressive portfolio, I deployed the assets that were previously housed in Fidelity Small Cap Stock into Fidelity Total Market Index due to the former's downgrade to Neutral from Bronze. While I would have preferred to maintain a dedicated small-cap position, all of Fidelity's worthy small-cap funds are closed to new investors.
Conservative Retirement Saver Portfolio for Fidelity Investors
10%: Fidelity Contrafund
10%: Fidelity Value Discovery
10%: Fidelity Total Market Index
7%: Fidelity Small Cap Stock
14%: Fidelity International Discovery
7%: Fidelity Short-Term Bond (FSHBX)
30%: Fidelity Total Bond
12%: Fidelity Strategic Real Return
3-Year Annualized Return: 7.72%
With just over half of its assets in stocks, this portfolio's returns were meaningfully below those of its more equity-heavy Aggressive and Moderate counterparts. Because this portfolio is geared toward savers who are just five years from retirement, it includes exposure to a short-term bond fund, Fidelity Short-Term Bond. With the bond market rewarding risk-taking, its three-year results were muted, but it's in place to supply stability should the intermediate-term bond fund encounter interest-rate-related or other volatility.
As with the Aggressive and Moderate portfolios, I steered the position in Fidelity Small Cap Stock, which saw a downgrade, into Fidelity Total Market Index.
Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.