Understanding High-Risk Fidelity Investments: What To Know

There are several ways to identify high-risk Fidelity investments. Firstly, it's important to understand that investing in stocks carries more risk than investing in bonds or short-term investments. Stocks are more volatile and can experience significant losses during market downturns. While diversification across different stocks can help mitigate this risk, investing in a single company or a sector-specific fund can be risky. Fidelity offers various low-volatility funds that aim to minimise risk and provide more stable returns. Additionally, investors can consider reducing their stock allocation and increasing their holdings in bonds and short-term investments, such as money market funds, which tend to be less volatile. It's also essential to align your investments with your risk tolerance, time horizon, and financial goals. Seeking professional investment advice can help you make informed decisions and construct a portfolio suited to your risk profile.

Diversify your portfolio with lower-risk equity investments

Diversifying your portfolio with lower-risk equity investments is a crucial step in effective financial planning. Here are some strategies to achieve this:

Spread Your Investments

Diversification is a well-known concept in investment management, and for good reason. By spreading your investments across various asset classes, sectors, and geographies, you reduce the risk of losing everything if one investment or market fails. This strategy allows you to "buy the haystack" instead of searching for a needle in a haystack.

Include Low-Risk Investments

When diversifying, it is essential to include low-risk investments such as bonds, money market funds, and certificates of deposit (CDs). These investments provide stability and help cushion the impact of volatile markets. For example, bonds are generally less volatile than stocks and can generate stable returns over the long term.

Consider Index and Bond Funds

Index funds and fixed-income funds are excellent additions to a diversified portfolio. Index funds track various market indexes, providing a broad market exposure with low fees. Fixed-income funds, on the other hand, help hedge your portfolio against market volatility and uncertainty.

Regularly Review and Rebalance Your Portfolio

Building a diversified portfolio is an ongoing process. Regularly review your investments and rebalance when necessary. Over time, market movements can cause your asset allocation to drift from your original plan. By periodically shifting earnings into underperforming parts of your portfolio, you maintain your intended allocation and practice the "buy low, sell high" strategy.

Know Your Risk Tolerance and Goals

The right asset allocation depends on your risk tolerance, time horizon, and financial goals. If you are more risk-averse, consider a more conservative portfolio with a higher allocation of bonds and money market funds. Conversely, if you have a longer time horizon and are comfortable with higher risk, you may opt for a higher exposure to stocks.

Avoid Over-Diversification

While diversification is essential, be cautious not to over-diversify. Investing in too many funds with overlapping holdings can increase costs without providing additional benefits. Aim for a well-balanced portfolio with a diverse range of asset classes, sectors, and geographies.

By following these strategies, you can effectively diversify your portfolio with lower-risk equity investments, reducing volatility and improving the stability of your investment portfolio. Remember, diversification does not guarantee profit or protect against all losses, but it is a powerful tool for managing investment risk.

Understand the risk of reinvestment

When interest rates fall, yields on short-term investments such as money market funds also tend to decrease. This means that when your short-term CDs and bonds mature, you may not be able to find new ones that offer the same returns as the old ones. This is known as reinvestment risk.

To avoid reinvestment risk, consider investing in longer-maturity investment-grade bonds issued by companies with high credit ratings and governments. These have historically delivered higher returns than short-term investments or stocks when the economy is slowing and interest rates are no longer rising. By investing in bonds with maturities of between three and ten years, or in a bond mutual fund or ETF, you can maintain the returns you seek from your portfolio while avoiding the risks associated with holding too many short-term investments.

In addition, longer-maturity bonds can provide a hedge against stock market declines, which often occur during economic slowdowns. While stocks typically lose value during recessions, bond prices tend to rise. Therefore, investing in longer-term bonds can help protect your portfolio from the negative impact of declining stock prices.

If you are unsure about how to adjust your investment strategy to manage reinvestment risk, consider seeking advice from a financial professional. They can help you create a plan that takes into account your timeline, goals, and risk tolerance to develop a portfolio that is right for you.

Consider asset allocation

Asset allocation is a crucial aspect of investment risk management. It refers to the mix of different investment types in your portfolio, which can include stocks, bonds, short-term investments like money market funds, and alternatives like commodities and real estate. The right asset allocation can help you diversify your investments, reducing the overall risk.

For example, if you feel you have too much stock market risk, you can reduce your stock allocation and increase your holdings of bonds and short-term investments. Bonds and short-term investments tend to be less volatile than stocks, so including them in your portfolio can help smooth out the impact of stock market swings.

You can further diversify your portfolio by investing in a wide range of assets within each broad classification. For instance, you can diversify your stock holdings by company size, market cap, industry, and geography. Similarly, you can diversify your bond holdings by type (government, corporate, and municipal), maturity, and other criteria.

It's important to note that while asset allocation and diversification can help manage risk, they do not guarantee a profit or protect against losses. The best investment strategy is one that aligns with your goals, risk tolerance, and financial situation, and that you can stick with for the long term.

• Fidelity Low Volatility Factor ETF: Seeks to invest in companies with lower volatility than the broader market.
• Fidelity US Low Volatility Equity Fund: Helps minimise volatility risk in down markets while benefiting from up markets.
• Fidelity 500 Index Fund (FXAIX): Offers S&P 500 exposure with no minimum investment requirements, trading commissions, or sales loads. It has a low expense ratio of 0.015%.
• Fidelity Total Market Index Fund (FSKAX): Tracks the Dow Jones US Total Stock Market Index, which includes thousands of mid- and small-cap stocks in addition to large-cap stocks. It has the same low expense ratio as FXAIX.
• Fidelity International Index Fund (FSPSX): Tracks the Morgan Stanley Capital International Europe, Australasia, Far East Index, providing exposure to international stocks. It has a low expense ratio of 0.035%.
• Fidelity ZERO Total Market Index Fund (FZROX): A true zero-expense-ratio fund, offering broad US exposure by replicating the Fidelity US Total Investable Market Index.
• Fidelity ZERO International Index Fund (FZILX): The international equivalent of FZROX, offering diversification across developed and emerging markets with no cost to investors.
• Fidelity Large Cap Growth Index Fund (FSPGX): Provides exposure to high-growth technology stocks and over 300 other large-cap growth companies, with a low expense ratio of 0.035%.

Know the types of investments

The main types of investments are stocks, bonds, and short-term investments like money market funds, but alternatives like commodities and real estate can also be used.

Stocks

Stocks are a type of security that represents ownership in a company. When you buy a stock, you're purchasing a small piece of that company, which means you become a shareholder. Stocks are typically bought and sold on stock exchanges, like the New York Stock Exchange (NYSE) or the Nasdaq. The value of stocks can fluctuate based on a variety of factors, including the company's financial performance, industry trends, and market conditions.

Bonds

Bonds are a type of security that represents a loan from an investor to a borrower, typically a corporation or a government. When you buy a bond, you're essentially lending money to the borrower, and in return, they promise to pay you back the face value of the bond (also known as the principal) plus interest at a specified future date. Bonds are often used by companies and governments to raise capital for projects or to fund their operations.

Money Market Funds

Money market funds are a type of mutual fund that invests in short-term, highly liquid assets such as Treasury securities, municipal debt, or commercial paper. They are considered low-risk investments because the underlying assets are typically high-quality and less volatile than other types of investments. Money market funds offer diversification and liquidity, but the income generated can fluctuate, and the investment is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or similar entities.

Commodities

Commodities refer to tangible assets such as precious metals (like gold and silver), agricultural products (like corn and wheat), energy products (like oil and gas), and other raw materials. Investing in commodities can be done through purchasing the physical commodity itself, derivatives (such as futures or options contracts), or exchange-traded products (ETPs) that track the price of a specific commodity or a basket of commodities.

Real Estate

Real estate investing involves purchasing property, such as land, buildings, or infrastructure, with the expectation of price appreciation, rental income, or both. It can include residential or commercial properties and can be done through direct ownership, real estate investment trusts (REITs), or online real estate platforms.

Understanding the different types of investments and their characteristics is crucial for making informed investment decisions. Each investment type comes with its own set of risks and potential rewards, and by diversifying across different types of investments, you can help manage risk and improve your long-term investment outcomes.

Weigh up the pros and cons of short-term cash investments

When weighing up the pros and cons of short-term cash investments, it's important to consider your financial goals, risk tolerance, and time horizon. Here are some advantages and disadvantages to help you decide if short-term cash investments are right for you:

Pros of Short-Term Cash Investments:

• Quick returns: Short-term investments like options and futures can give you quick wins, whereas investing in stocks or bonds can take a long time to see any profit.
• Liquidity: Short-term investments are typically easily converted into cash, providing flexibility and quick access to funds in case of emergencies or other investment opportunities.
• Control: Since most short-term investments last for a few months or less, you can make changes or switch investments easily, giving you more control over your funds.

Cons of Short-Term Cash Investments:

• Volatility: Short-term investments are often more volatile and riskier than long-term investments. A sudden market drop or a bad financial decision can result in significant losses.
• Lower returns: The returns on short-term investments are usually lower than those on long-term investments.
• Higher fees: Short-term investments typically have higher fees and expenses, which can eat into potential profits.
• High costs: Short-term investing can come with high costs due to high transaction volumes and brokerage commission fees. Taxes and inflation can also reduce returns.
• Expertise and time: Short-term investing requires a certain level of expertise and time commitment as investors must closely monitor price movements and identify purchase and sale spots.

Frequently asked questions