Model Portfolios for Fidelity Investors

When I began working at Morningstar more than 30 years ago (cue dinosaur jokes), Fidelity’s actively managed stock funds were the mutual fund industry’s shining stars. Peter Lynch had already retired, but Fidelity Magellan FMAGX was still the biggest stock fund in the United States. Will Danoff of Fidelity Contrafund FCNTX and Joel Tillinghast at Fidelity Low-Priced Stock FLPSX were making strong names for themselves. It was the era of the “star fund manager,” and Fidelity’s stock-fund managers were at the center of the firmament.

Investors’ interest in actively managed funds has waned over the past few decades, but Fidelity has done a fine job changing with the times. As Robby Greengold notes in his Parent rating for the firm, Fidelity has introduced its own lineup of low-cost passively managed products and has long operated a topflight fixed-income operation. The firm also oversees more 401(k) assets than any other, meaning that many workers wind up with a Fidelity retirement account and eventually a rollover IRA at the firm.

For investors who choose to hold their assets at Fidelity, the company offers all the key building blocks they need. I’ve created model portfolios for investors at different life stages (retired versus still working/saving) and different account types (taxable versus tax-sheltered). Investors can adopt the portfolios wholesale, but the portfolios can also be useful from the standpoint of benchmarking.

Here’s a closer look at the Fidelity-specific portfolios. Their holdings, a combination of active and passively managed mutual funds, all receive at least a Morningstar Medalist Rating of Bronze from our manager research analysts.

Model Fidelity Portfolios for Retirees

These portfolios are geared toward people who are already retired and actively drawing on their portfolios to supply their cash flows. To help facilitate portfolio withdrawals in a variety of market conditions, they all include a cash bucket to cover a few years’ worth of portfolio withdrawals. In line with the Bucket system for retirement portfolio construction, they hold another eight years’ worth of spending in high-quality bonds and the remainder in riskier assets—mainly a globally diversified equity portfolio. (The Moderate and Conservative versions have slightly higher weightings in cash and bonds.) Fidelity’s default cash option for brokerage clients is Fidelity Government Money Market, which currently pays out close to 5%, a highly competitive yield. Fidelity Tax-Exempt Money Market is a solid choice for the cash holdings of investors in higher tax brackets.

Tax-Sheltered In-Retirement Portfolios

These portfolios are geared toward investors’ retirement accounts—mainly their traditional and Roth IRAs. Because investors don’t owe taxes on such accounts until they pull their money out in retirement, I chose the holdings without regard for tax efficiency. The portfolios hold Fidelity Total Bond FTBFX for their core fixed-income exposure, as well as ancillary bond holdings such as Fidelity Strategic Income FADMX to serve as an aggressive kicker and Fidelity Short-Term Bond FSHBX to serve as next-line reserves in case the cash holdings are depleted. On the equity side, I’ve employed Fidelity Large Cap Stock FLCSX, ably steered by Matt Fruhan for nearly 20 years, along with a total market index fund to help lower the portfolios’ total costs.

Tax-Efficient In-Retirement Portfolios

In contrast with the portfolios above, which are for traditional and Roth IRAs, these portfolios are designed for investors’ taxable (nonretirement) accounts. In an effort to limit the drag of taxes on an ongoing basis, I’ve employed total market index funds for equity exposure and Fidelity municipal-bond funds on the fixed-income side. Retirees should use their own tax brackets to determine whether to employ municipal bonds or taxable; Fidelity’s tax-equivalent yield calculator, while designed for individual bond comparisons, can aid in that analysis. I’ve created Aggressive, Moderate, and Conservative versions of these portfolios. Retirees should use their own portfolio spending to determine which of these versions is the best fit given their situations. For example, the retiree who gets all of her cash flow needs from Social Security and her required minimum distributions from her IRA may want to opt for the Aggressive version for her taxable account, because she’s not actively spending from it.

Model Fidelity Portfolios for Retirement Savers

These portfolios are designed for investors who are still working and saving for retirement. They loosely follow the allocations of Morningstar’s Lifetime Allocation Indexes to guide their allocations. Investors should use both their risk tolerance and especially their risk capacity to inform which type of asset allocation makes the most sense for them.

Tax-Sheltered Retirement Saver Portfolios

These portfolios are geared toward retirement savers’ tax-sheltered accounts, whether traditional or Roth. Because they’re managed without regard for tax efficiency, they feature a mix of equity index funds as well as actively managed stock funds and bond funds. However, a minimalist investor could reasonably use a three-fund portfolio instead: Fidelity Total Stock Market FSKAX, Fidelity Total International Index FTIHX, and Fidelity U.S. Bond Index FXNAX. (An ultra-minimalist investor could opt for one of Fidelity’s Freedom target-date funds, such as one of the funds in the Silver-rated Index series.)

Tax-Efficient Retirement Saver Portfolios

These portfolios are designed for retirement savers’ taxable (nonretirement accounts). In an effort to reduce taxes, they use index funds for their equity exposure and municipal-bond funds for fixed income, both areas where Fidelity fields superb options. However, investors should consider their own tax bracket when determining whether taxable or municipal bonds are the better fit. Alternatively, they could silo their fixed-income holdings in their tax-sheltered accounts and reserve their taxable account for tax-efficient equity investing and whatever cash they need for imminent expenditures or emergency funding.