Choosing Investments: Fidelity's Guide To Smart Investing

Choosing investments can be overwhelming, but there are some simple choices that can make it easier. It's important to first establish what you're investing for, and then choose an account type. There are three main account types: brokerage accounts, 401(k)s, and individual retirement accounts (IRAs). After that, you can start to think about what to invest in.

Some of the most common investment options include stocks, bonds, mutual funds, and exchange-traded funds (ETFs). When deciding what to invest in, it's important to consider your risk tolerance and your goal's time horizon.

Individual stocks and bonds

Stocks

Stocks represent a piece of ownership, or a share, in a public company. Stock prices go up and down all the time, depending on a number of factors, including company performance and the news. So while investing in stocks can be very rewarding, they're also considered a riskier option. Before buying individual stocks, do your research, and avoid putting all your eggs in one basket.

Bonds

Investing in bonds is like giving out loans to companies or governments that agree to pay you back with interest. Bonds are typically considered lower risk compared to stocks and are assigned grades so you can better understand the risk that the issuer will default on their promise to repay you.

Mutual funds and ETFs

Mutual funds have been around for a century, while ETFs are relatively new, having debuted in 1993. Mutual funds are actively managed, meaning fund managers make decisions about how to allocate assets. ETFs, on the other hand, are usually passively managed and track market indexes or sector sub-indexes. Mutual funds can only be purchased at the end of each trading day, while ETFs can be bought and sold like stocks throughout the trading day. This makes ETFs a better choice for active traders.

ETFs are also often cheaper to invest in, as mutual funds typically have minimum investment requirements of hundreds or thousands of dollars. Additionally, ETFs may be more tax-efficient than mutual funds because of the way they are created and redeemed. With ETFs, there is no possibility of capital gains tax liability for shareholders who are not trading shares.

Fidelity mutual funds have no minimum investment requirements, which makes them attractive to new and young investors. They also offer $0 transaction fees and zero-expense-ratio index funds, allowing investors to invest effectively free of charge.

Robo advisors

A robo advisor is a digital financial service that automates investing based on the information you provide about yourself and your financial situation. "Robo" refers to the service being almost completely digital, and "advisor" refers to the human advisors behind the scenes who offer digital investment advice and account management services. Fidelity's robo advisor is called Fidelity Go.

Here's how it works:

A hybrid robo advisor typically refers to a robo advisor that includes access to investment adviser representatives, either via telephone or in person. In the case of Fidelity Go, it combines its digital offering with access to 1-on-1 financial planning and coaching via telephone for clients that invest at least $25,000 in a Fidelity Go account. These conversations happen over the phone, making this service more affordable than meeting in person with a traditional financial advisor.

Depending on the investments in your managed portfolio, you may pay additional management fees on certain investments (such as mutual funds and ETFs) in addition to your robo advisory fees. That's why it's important to research different robo advisors to see what types of investments they offer and whether those come with any additional fees.

A robo advisor can help manage the risk that comes with investing in three ways:

• Diversification: A robo advisor suggests an appropriate mix of stocks, bonds, and short-term investments based on your personal goals and risk tolerance, spreading your money across different investments to potentially reduce your risk.
• Market monitoring and analysis: A robo advisor monitors and analyzes the markets for you, so you don't have to.
• Automatic rebalancing: A robo advisor automatically rebalances your investments when changes are needed due to market conditions or other factors to help your portfolio stay on track.

401(k) plans

A 401(k) is a retirement savings plan that allows you to invest a portion of each paycheck before taxes are deducted, depending on the type of contributions made. It is a popular option, with around 42% of the working population in the US using it to save for retirement.

• Understand what a 401(k) is: It is a "tax-advantaged" investment account, meaning the money you contribute each year, usually a percentage of your paycheck, lowers your taxable income. There are two types: the traditional 401(k) and the Roth 401(k). The traditional 401(k) is more common, and the money you put in hasn't been taxed yet. With the Roth 401(k), you contribute money that has already been taxed, and you don't pay taxes when you withdraw in retirement.
• Determine how much you can contribute: Financial experts advise contributing as much as you can, ideally between 10% and 15% of your income, especially when you are young. If your employer offers a matching contribution, be sure to contribute at least enough to get the full benefit.
• Calculate your risk tolerance: Determine your asset allocation, or how much of your investments will be in stocks (also known as equities) and how much will be in safer investments, like bonds. Stocks offer the potential for greater returns but can be more volatile, while bonds are more stable but may offer lower returns over time.
• Pick your investments: You will typically select one or more mutual funds or exchange-traded funds (ETFs) that invest in a range of companies and sectors. Research each fund's fees, performance over time, and holdings. Look for funds with low expense ratios, ideally below 1%. You can also consider investing in index funds, which follow a market benchmark and are a form of passive investing.
• Consider a target-date fund: This is a simpler option where you select a target retirement year and risk tolerance, and the fund automatically adjusts its asset allocation over time.
• Scale up contributions over time: Increase your contributions each time you get a raise or bonus, helping you reach your goals faster.

Remember, investing in a 401(k) is a long-term strategy, and the stock market will have its ups and downs. Focus on consistently investing over time, choosing low-cost funds, and diversifying your investments.

IRAs

With a Traditional IRA, you can deduct all or part of your contributions from your federal taxes if you meet the income eligibility. This type of IRA also allows you to withdraw funds penalty-free for certain expenses, such as a first home purchase, birth, or college costs. Additionally, there are no income limits to contributing to a Traditional IRA, as long as you are working.

On the other hand, Roth IRAs offer the potential for tax-free growth and tax-free withdrawals in retirement. This means that you can keep more of what you earn. To decide between a Traditional and Roth IRA, consider your current and future tax brackets, as well as your income eligibility.

When choosing investments for your IRA, it's important to consider your risk tolerance, investment timeframe, and financial situation. Stocks, bonds, exchange-traded funds (ETFs), and mutual funds are all options to consider. The younger you are, the more heavily you may want to tilt your investment mix towards stocks, as you have more time to ride out any market ups and downs. However, as you get closer to retirement, you may want to adjust your allocation to reduce the risk of losing money in a market downturn.

Fidelity offers a range of tools and resources to help you choose and manage your IRA investments, including the IRA Contribution Calculator and the Planning & Guidance Center.

Frequently asked questions