Fidelity's Investment Strategies: A Comprehensive Guide

Fidelity offers a range of investment strategies to suit different client needs and interests. These strategies are designed to help investors manage risks, reduce taxes, and make informed decisions about their financial goals. Fidelity's investment approaches include sector-based strategies, dollar-cost averaging, tax-smart investing, and diversification. Additionally, Fidelity provides resources for evaluating alternatives, such as their Portfolio Insights report, and offers sustainable investing options for clients looking to align their portfolios with their values.

Dollar-cost averaging

Fidelity offers a range of investment strategies, one of which is dollar-cost averaging. This strategy involves investing equal dollar amounts at regular intervals, such as $25 a month, regardless of market movement. This means that investors will buy more when prices are low and less when prices are high.

An investor decides to invest $1,000 at the start of 2018 using a dollar-cost averaging strategy. They choose to invest $100 worth of bitcoin at the beginning of every month for 10 months. During this time, bitcoin experiences a bear market, and by the end of 2018, their portfolio has dropped in value. However, by mid-2021, bitcoin has recovered and hit new highs, resulting in their portfolio being worth considerably more than their initial investment.

However, there are also potential drawbacks to this strategy. Dollar-cost averaging may result in lower returns compared to investing a lump sum if the price goes up over time. It requires holding funds in cash, which could generate low rates of return, and investors may need to sit through periods where their investments are making losses. It may also result in higher transaction costs due to multiple trades.

Overall, dollar-cost averaging can be a useful strategy for investors who are confident in the long-term prospects of their chosen asset and are comfortable with the potential drawbacks.

Tax-smart investing

Understand Capital Gains Tax Rates

The profits you earn from selling investments are called capital gains. If you hold an investment for more than a year, it is considered a long-term capital gain, and if you hold it for a year or less, it is a short-term capital gain. Short-term and long-term gains are taxed differently, with federal tax rates on short-term gains always being higher. It is smart to hold investments for more than a year before selling to take advantage of the lower long-term federal capital gains tax rate.

Practice Tax-Loss Harvesting

If you are selling at a loss, you may deduct those losses from your capital gains, which could lower your tax bill. You can deduct up to $3,000 of capital gains or ordinary income per year with those losses. You could even replace the assets you sold with reasonably similar investments 30 days after you've sold them. This strategy ensures that less of your money goes to taxes, and more can stay invested and working for you.

Invest Through Tax-Advantaged Accounts

If your investing goal is to save money for retirement, education, or healthcare, first consider investing through tax-advantaged accounts such as a 401(k), an IRA, a 529, or an HSA. These accounts can help you score tax deductions and reduce your tax liabilities.

Find the Right Location for Your Assets

Some assets, often those that regularly produce interest, dividends, or distributions subject to capital gains taxes, are by nature less tax-efficient than others. For example, bonds and bond funds (except for municipal bonds and some savings bonds), real estate investment trusts (REITs), and actively managed stock funds. Investors may want to concentrate less tax-efficient holdings in tax-deferred accounts such as a traditional IRA or 401(k) or tax-exempt accounts like a Roth IRA or Roth 401(k).

Consider Adding Tax-Efficient Assets

For taxable brokerage accounts, consider adding assets that generate little or no taxable income, such as municipal bonds or ETFs, passively managed index funds and ETFs, and tax-efficient active mutual funds. These assets can provide tax efficiency while still aligning with your overall investment strategy.

Manage Capital Gains

Holding securities for at least a year offers investors rewards from a tax standpoint. Gains on investments held for a year or less are taxed at your federal ordinary income rate, which can go as high as 37%. However, anything held for over a year is taxed at the lower federal long-term capital gains rate of up to 20%, depending on your taxable income.

Choose Withdrawals Carefully

When withdrawing from a taxable account, consider how it may impact both the investment mix and your tax bill, as securities with a low cost basis will incur higher realized capital gains when sold. If you have retirement accounts, consider rebalancing your portfolio in those accounts following withdrawals since you won't incur capital gains on trades within tax-advantaged accounts.

Harvest Losses

Market volatility can provide opportunities to reduce taxes on realized capital gains through tax-loss harvesting. Net capital losses can be used to net out taxable gains, and remaining capital losses can offset up to $3,000 of taxable income per year. Additionally, any unused losses can be carried forward for the life of the investor. Tax-loss harvesting can be a powerful strategy, but it is important to be cautious of wash-sale rules, which can disallow the write-off.

Diversification

Why Diversification Matters

Components of a Diversified Portfolio

A well-diversified portfolio typically includes a mix of stocks, bonds, short-term investments, and international stocks. Stocks represent the most aggressive portion, offering higher growth potential but also carrying greater risk. Bonds, on the other hand, provide regular interest income and are generally less volatile. Short-term investments, such as money market funds and certificates of deposit (CDs), offer stability and easy access to funds but may provide lower returns. International stocks expose you to opportunities beyond the US market, offering higher potential returns but also higher risk.

• Determine Correlation: Ensure your portfolio includes investments with low or negative correlations. For example, a mix of stocks and bonds is a classic diversification strategy, as they often move in opposite directions.
• Diversify Across Asset Classes: Invest in multiple primary asset classes, such as fixed-income investments (bonds), cash and cash equivalents, and real assets (property and commodities).
• Diversify Within Asset Classes: Within each asset class, you can further diversify. For instance, in the energy sector, consider adding tech, biotech, utility, and retail sectors to your portfolio.
• Diversify by Location: Include foreign stocks and bonds to gain exposure to global markets, but be mindful of country-specific risks like foreign taxation and currency risks.
• Explore Alternative Investments: Consider investing in Real Estate Investment Trusts (REITs), commodity investments, or reinsurance pooled funds to further diversify your portfolio.

When to Diversify and Rebalance

Final Thoughts

Defensive investing

A defensive investment portfolio typically allocates a larger portion of funds to fixed-income securities, such as bonds, and a smaller portion to equities, such as common stocks. The primary objective is to preserve capital and generate stable, predictable returns.

• Define your risk tolerance: Assess your risk tolerance based on your investment goals, time horizon, and ability to withstand market volatility.
• Focus on quality: Invest in companies with strong balance sheets and solid performance track records.
• Diversify your portfolio: Spread investments across various asset classes, including defensive stocks, bonds, and cash. Focus on defensive sectors such as utilities, consumer staples, healthcare, and telecommunications, which offer essential products and services that are resilient during economic downturns.
• Consider dividend-paying stocks: Include stocks with a history of consistent dividend payments and sustainable yields.
• Incorporate fixed-income investments: Include government bonds or highly-rated corporate bonds in your portfolio. Adjust the bond duration and yield based on your risk appetite and the interest rate environment.
• Rebalance your portfolio: Monitor your performance and periodically adjust it to maintain your desired asset allocation. Sell overperforming assets and allocate funds to underperforming or defensive assets.
• Use stop-loss orders: Protect your portfolio against sudden declines in stock value by setting stop-loss orders.
• Maintain a cash cushion: Hold a portion of your portfolio in cash or highly liquid assets to seize investment opportunities during market downturns and provide a sense of security and flexibility.

While defensive investing may not yield high returns, it aims to generate consistent and steady returns over time, focusing on long-term wealth accumulation and financial security.

Partnering with a financial professional

Fidelity Wealth Management offers access to an advisor who can help you plan, invest, and make important financial decisions. This service is available to clients with at least $500,000 invested in eligible Fidelity accounts. The partnership is built upon a foundation of planning, investment management, and a strong working relationship with your advisor.

• Investment guidance: Financial advisors can help you create and follow a disciplined investment process, including an appropriate asset allocation strategy, to improve your investment returns. They can provide a steady hand during stressful market periods and help you navigate the markets to reach your goals.
• Tax rules navigation: Advisors can assist in determining which investments are better suited for specific accounts, such as a TFSA or a registered retirement savings plan, to reduce overall taxes on your investments. They can also help manage your long-term tax situation, maximising cash flow, especially during retirement.
• Financial planning for life: A financial advisor can help you manage retirement savings and spending, as well as the financial impact of life events such as having children or caring for ageing parents. They can also assist in creating a plan to protect your loved ones in the event of health issues or other risks that may affect your financial situation.
• Holistic approach to allocating assets: Advisors provide guidance on allocating your assets across accounts with different tax treatments, helping to maximise long-term growth. This includes all money managed by Fidelity and other firms.
• Proactive investing and planning advice: Your advisor will proactively offer investing and planning advice and connect you with specialists for tailored guidance on topics like estate planning and insurance.
• Annual in-depth review: At least once a year, your advisor will initiate a comprehensive review of your financial situation, helping you uncover opportunities and making necessary adjustments to your investment strategies.

Frequently asked questions