Crafting A Diversified Portfolio With Fidelity Investments

Choosing a diversified portfolio is a great way to balance risk and reward in your investment strategy. Diversification is a practice of spreading your investments to limit exposure to any one type of asset. This helps to reduce the volatility of your portfolio over time and can be achieved through a single fund or multiple funds. Fidelity offers various types of asset allocation funds, including target date funds and target allocation funds, which provide an easy-to-manage diversified portfolio. When choosing a diversified portfolio, it's important to consider your risk tolerance, investment objectives, and time horizon. Additionally, regular rebalancing is key to maintaining your risk levels over time.

Stocks, bonds, cash, and other investments

Stocks

Stocks represent the most aggressive portion of your portfolio and offer the potential for higher growth over the long term. However, this higher growth potential comes with greater risk, especially in the short term. Stocks are generally more volatile than other asset types, so your investment in a particular stock could lose value if and when you decide to sell it. It's important to diversify across different stocks and sectors to reduce company-specific or unsystematic risk.

Bonds

Bonds are considered a more stable investment option and usually provide regular interest income. They are generally less volatile than stocks and can act as a cushion against the unpredictable nature of the stock market. US Treasury bonds and other high-quality bonds are favoured by investors who prioritise safety over growth. While these bonds offer lower long-term returns compared to stocks, they provide more stability. Fixed-income investments like Treasury bills, bankers' acceptances, and certificates of deposit are also popular for diversification due to their low correlation with other major asset classes.

Cash

Cash, including money market funds and short-term certificates of deposit (CDs), is a conservative investment option that offers stability and easy access to your funds. Money market funds are ideal for those seeking to preserve their principal and don't want to take on too much risk. However, these investments typically provide lower returns than bond funds or individual bonds, and they are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) like many CDs.

Other Investments

Real estate, precious metals, and currencies are other investment options to consider for diversification. Real estate investment trusts (REITs) are a practical way to gain exposure to the real estate market without directly purchasing property. Gold and other precious metals serve as safe-haven assets, especially during times of market turmoil and inflation. Additionally, investing in international stocks and mutual funds can provide exposure to different markets and potentially higher returns, although they also carry higher risk.

When constructing your portfolio, it's important to choose investments with returns that haven't historically moved in the same direction and to the same degree. This helps ensure that even if a portion of your portfolio is declining, other investments are likely to be growing or, at the very least, not declining as much. Diversification is a key component of any smart investment strategy and can help balance risk and reward while reducing volatility.

Risk level and asset allocation

When choosing a diversified portfolio, it is important to consider your risk tolerance and financial goals. Fidelity offers various model portfolios to help investors determine an appropriate asset mix based on their risk tolerance, investment time frame, and financial objectives. Here are some key considerations regarding risk level and asset allocation:

Understanding Risk Tolerance

Before investing, it is crucial to assess your risk tolerance, which refers to how much risk you are comfortable taking on. Different investors have different levels of risk tolerance, and it is important to be honest with yourself about your ability to take on risk. Your risk tolerance will influence the types of assets you choose for your portfolio.

Asset Allocation

Asset allocation is the process of diversifying your investments across different asset classes, such as stocks, bonds, and short-term investments. A well-diversified portfolio typically includes a mix of these asset classes, with the specific allocation depending on your risk tolerance and financial goals.

Time Horizon

Your time horizon, or how long you plan to invest for, is an important consideration when determining your asset allocation. If you have a long-term investment horizon, you may be willing to take on more risk to pursue higher returns. On the other hand, if your investment horizon is shorter, you may opt for more conservative investments to preserve your capital.

Risk and Return

It is important to understand the relationship between risk and return. Generally, investments with higher potential returns come with higher risk. For example, stocks typically offer higher growth potential over the long term but carry more risk, especially in the short term. On the other hand, bonds are usually considered less volatile but may offer lower long-term returns.

Monitoring and Rebalancing

Once you have determined your asset allocation, it is important to regularly monitor your portfolio. Your financial circumstances, risk tolerance, or investment goals may change over time, and your asset allocation should be adjusted accordingly. Additionally, rebalancing your portfolio helps maintain your desired risk level by buying or selling assets to return to your target allocation.

Single-Fund Strategies

If you prefer a simpler approach to investing, Fidelity offers single-fund strategies, such as target date funds and target allocation funds. These funds provide a diversified portfolio in a single investment, managed by professionals. Target date funds adjust their asset allocation over time based on your changing time horizon, while target allocation funds maintain a constant asset allocation.

In conclusion, when choosing a diversified portfolio, carefully consider your risk level and desired asset allocation. Assess your risk tolerance, time horizon, and financial goals to determine an appropriate mix of assets. Remember to regularly monitor and rebalance your portfolio to stay aligned with your investment strategy.

International stocks

However, foreign investments involve greater risks than US investments, including political and economic risks, and the risk of currency fluctuations. These risks are magnified in emerging markets.

Despite short-term obstacles, Fidelity researchers expect international stocks to potentially outperform US stocks over the next 20 years. The biggest opportunities may be in emerging market stocks, particularly Chinese companies.

You can add international stocks to your portfolio by buying stocks, ETFs, and mutual funds with exposure to foreign markets. You can trade on US and international exchanges in a single account.

Single-fund strategies

Fidelity offers two common types of single-fund strategies: target date funds and target allocation funds. Both allow you to own a diversified portfolio through a single investment.

Target Date Funds

Target date funds are ideal for investors who know their expected retirement date and may need to begin withdrawing money from their retirement accounts. These funds are professionally managed with a specific target date in mind. When the target date is many years away, the fund manager may invest more aggressively by concentrating the fund's assets in higher-risk assets like domestic and international stocks. As the target date approaches, the mix becomes more conservative, with the manager slowly reducing the portfolio's exposure to stocks in favour of investments such as bonds and money market investments.

Fidelity Freedom® Funds are an example of target date funds. The underlying investments consist of Fidelity mutual funds representing different asset classes and are regularly rebalanced based on Fidelity's proprietary glide path or asset allocation mix.

Target Allocation Funds

The primary difference between target date funds and target allocation funds is that while target date funds' asset allocations are continually shifting in response to an investor's changing time horizon, target allocation funds' asset allocations remain constant. For example, if a fund's target allocation is 70% stocks and 30% bonds, the fund manager will make adjustments to the portfolio as needed to maintain this mix. These funds may be suitable for investors who understand their tolerance for risk and how that translates into an asset allocation. However, it is important to remember that the right asset allocation today may not be suitable in the future. As your time horizon changes, it is crucial to evaluate your investments to ensure they align with your investment objectives.

Fidelity Asset Manager® Funds are an example of target allocation funds. These funds allow you to choose an asset mix based on your risk tolerance and offer diversification across multiple asset classes.

Advantages of Single-Fund Strategies

• Simplicity and convenience: You don't need to worry about building or actively managing your portfolio.
• Diversification: Single-fund portfolios provide a diversified mix of investments across different asset classes and securities.
• Disciplined investment approach: It can be challenging to stay on track when managing your own investments, especially during volatile markets. Most fund managers follow a carefully developed investment methodology that can help you adhere to the funds' investment objectives.

Mutual funds

Types of Mutual Funds

Fidelity offers a range of mutual funds, including domestic stock funds, international and global stock funds, and bond funds.

#### Domestic Stock Funds

Domestic stock funds invest primarily in stocks of companies based in the same country as the fund. For example, a US domestic stock fund will focus on investing in stocks of US-based companies.

#### International and Global Stock Funds

International and global stock funds invest in stocks of companies based outside of the fund's home country. For example, an international stock fund may invest in stocks from Europe, Asia, or other regions. Global stock funds, on the other hand, can invest in stocks from any country around the world, including the fund's home country.

#### Bond Funds

Bond funds are a type of mutual fund that invests in a variety of bonds, such as government bonds, corporate bonds, or municipal bonds. They provide a more efficient way for investors to access the bond market compared to purchasing individual bonds.

Choosing the Right Mutual Funds

When selecting mutual funds, it is essential to consider your risk tolerance, investment goals, and time horizon.

#### Risk Tolerance

Different types of mutual funds come with varying levels of risk. For example, stock funds are generally considered more aggressive and risky, especially in the short term, while bond funds are often seen as more conservative and stable.

#### Investment Goals

Consider whether you are investing for capital appreciation, income generation, or a combination of both. Different mutual funds are managed with different objectives, so align your investment goals with the fund's objectives.

#### Time Horizon

Your time horizon refers to how long you plan to invest for. If you are investing for the long term, you may be more comfortable with higher-risk funds that can provide greater growth potential. If you have a shorter time horizon, you may prefer more conservative funds to protect your capital.

Benefits of Mutual Funds

• Diversification: Mutual funds provide instant diversification by spreading your investments across a wide array of securities. This helps to reduce risk and minimize the impact of market volatility on your portfolio.
• Professional Management: Mutual funds are managed by professional fund managers who have the expertise and resources to research and select appropriate investments, construct well-diversified portfolios, and make ongoing adjustments as needed.
• Affordability: Mutual funds allow you to access a diversified portfolio of securities with a relatively small amount of money. By pooling your money with other investors, you can invest in a variety of securities that may be difficult to access individually.
• Liquidity: Mutual funds offer more liquidity compared to other investments like real estate. You can easily buy or sell mutual fund units at any time, providing flexibility and access to your money.

Considerations

While mutual funds offer many benefits, there are a few considerations to keep in mind:

• Fees: Mutual funds typically charge management fees, which can vary depending on the fund. Be sure to understand the fee structure and associated costs before investing.
• Potential for Capital Losses: As with any investment, there is a risk of losing money when investing in mutual funds. The value of your investment can fluctuate, and there is no guarantee of gains.
• Lack of Control: When investing in mutual funds, you are entrusting your money to a professional fund manager. While this provides the benefit of expert management, it also means you have less direct control over the specific investments made by the fund.

Fidelity's Model Portfolios

Fidelity offers model portfolios as a resource to help you construct a well-diversified portfolio of mutual funds based on your risk tolerance and financial situation. These model portfolios provide examples of potential combinations of Fidelity mutual funds that can help you generate ideas and determine the right mix for your needs.

Fidelity's Single-Fund Strategies

If you prefer a more hands-off approach, Fidelity also offers single-fund strategies, such as the Fidelity Asset Manager® Funds and Fidelity Freedom® Funds. These funds provide built-in diversification across multiple asset classes, and Fidelity handles the ongoing research and rebalancing for you.

In conclusion, mutual funds can be a powerful tool for investors seeking to build a diversified portfolio. They offer instant diversification, professional management, affordability, and liquidity. By considering your risk tolerance, investment goals, and time horizon, you can select mutual funds that align with your financial objectives and help you achieve your investment goals.

Frequently asked questions