Fidelity Investments: A Guide To Understanding The Basics

Fidelity Investments is a financial services company that offers a range of investment options, including mutual funds, exchange-traded funds (ETFs), and brokerage services. Understanding Fidelity Investments involves comprehending the various investment products and services they provide, as well as their fees, performance, and suitability for different investors. Fidelity is known for its reliability and offers a wide range of investment choices, making it an attractive option for beginners and experienced investors alike. Before investing, it's important to educate yourself on the basics of investing, set financial goals, and understand your risk tolerance. Consulting a financial advisor can also provide personalized advice based on your financial situation.

Understand the basics of investing

Investing is a great way to build wealth and secure your financial future. It involves putting money into an asset, expecting a return on your investment. There are several types of investments, including stocks, bonds, mutual funds, real estate, and commodities. Each type of investment has its own risks and rewards, and understanding these is crucial before making any investment decisions. Here are some essential things to know about investing:

• Stocks: Buying stocks means buying shares in a company, making you a shareholder. If the company performs well, the value of your stock increases, and you can sell it for a profit. However, if the company does poorly, your stock's value may decrease, resulting in a loss.
• Bonds: Bonds are a type of debt investment where you lend money to a government or company. They offer steady income with lower risk and pay interest over a set period, returning the full principal amount at the end.
• Mutual Funds: Mutual funds involve a group of investors pooling money to buy stocks, bonds, and other investments. They provide diversification and professional management but may have higher fees.
• Real Estate: This involves buying, selling, and renting property, offering a steady income source but also carrying significant risks, such as location, market conditions, and maintenance costs.
• Commodities: Commodities are physical items like gold, oil, or wheat, bought and sold on the commodities market. They can provide good returns but are risky due to volatile prices.

Key Considerations:

• Diversification: Diversifying your portfolio by investing in different types of assets is essential to reducing risk.
• Long-term Perspective: Investing is typically a long-term strategy, and it's important to stay patient and committed through market fluctuations.
• Understanding Risks: Every investment carries risk, and it's crucial to comprehend the risks associated with each type of investment before committing your money.
• Planning: Having a clear investment plan and strategy is vital to achieving your financial goals.

Before investing, it's important to educate yourself, set financial goals, create a budget, and choose the right investment accounts, such as brokerage accounts, Individual Retirement Accounts (IRAs), or employer-provided plans like 401(k). You can start small and gradually increase your investments as you gain knowledge and confidence. Consulting a financial advisor is also beneficial if you need personalized advice.

Set financial goals

Setting financial goals is a crucial step in your investment journey. It provides clarity, direction, and purpose to your investment strategy. Here are some detailed instructions to help you set effective financial goals:

• Identify your priorities: Ask yourself, "What is most important to me financially?" Your priorities could include saving for retirement, buying a home, funding your child's education, or achieving financial independence. Clearly understanding your priorities will help you allocate your resources effectively.
• Define your short-term and long-term goals: Short-term financial goals are those you want to achieve within the next year or so. This could include saving for a vacation, building an emergency fund, or paying off credit card debt. Long-term financial goals are those that will take several years to accomplish, such as saving for a down payment on a house or funding your child's college education. Clearly define both types of goals, as they will influence your investment strategies and timelines.
• Make your goals SMART: Ensure your financial goals are Specific, Measurable, Achievable, Relevant, and Time-bound. For example, instead of saying, "I want to save for retirement," make it more specific, such as, "I want to save $1,000,000 for retirement by the time I turn 60." This gives you a clear target to work towards.
• Quantify your goals: Whenever possible, assign a monetary value to your goals. For example, if you're saving for a house, research the average home prices in your desired neighborhood. If you're saving for retirement, use online calculators to estimate the total amount you'll need. Quantifying your goals will help you create a more precise plan.
• Create a timeline: Assign a realistic timeframe to each of your goals. For long-term goals, break them down into smaller, achievable milestones. For example, if your goal is to save for a house in 5 years, set monthly or quarterly savings targets to help you stay on track.
• Prioritize your goals: If you have multiple financial goals, prioritize them based on their importance to you and your current life stage. For instance, if you're in your 20s, funding your retirement account might be a higher priority than saving for your child's education. Prioritization will help you focus your resources on the most important goals first.
• Regularly review and adjust: Financial goals should be dynamic, not set in stone. Review your progress regularly and make adjustments as necessary. For example, if you get a raise, you may be able to increase your contributions towards your goals. Similarly, if your expenses increase, you may need to adjust your savings rate accordingly.

Remember, setting financial goals is a personal process that requires introspection and self-awareness. Be honest with yourself about what you want to achieve financially, and use these goals as a foundation for your investment strategies and decisions.

Create a budget

Creating a budget is an essential step in achieving financial independence and understanding your spending habits. It involves determining how much money you can afford to invest while maintaining a comfortable lifestyle. Here are some steps to help you create a budget:

Understand Your Income:

Start by calculating your monthly income. If you have a predictable income, add up your paychecks for the month. If your income varies, use the lower range of your past monthly earnings. For instance, if your monthly income ranges from $2500 to $5000, create your budget based on expecting $2500. This way, if you end up with more, you can allocate it to savings or investments.

Track Your Expenses:

Make a comprehensive list of your monthly expenses. This includes fixed expenses such as rent, utilities, and insurance, as well as variable costs like groceries, transportation, and entertainment. Don't forget to include smaller purchases, as they can add up quickly. Keep receipts or use digital tools to track your spending.

Set Financial Goals:

Define your short-term and long-term financial goals. Are you saving for a dream vacation, a new home, or paying off debt? Setting clear goals will help you stay motivated and guide your budgeting decisions.

Allocate Your Funds:

Fidelity recommends the 50/15/5 guideline for budgeting:

• 50% for essentials: Allocate no more than half of your income to must-haves, such as housing, utilities, groceries, and debt payments.
• 15% for retirement savings: Try to save 15% of your pre-tax income for your retirement years.
• 5% for short-term savings: Keep 5% of your income in an easily accessible savings account for emergencies, such as medical bills or unexpected repairs.
• Discretionary spending: Use the remaining amount for discretionary purchases, like dining out or entertainment.

Be Mindful of Your Spending:

Avoid setting unrealistic spending limits. Instead, make gradual adjustments to your budget. For example, if you want to reduce dining out expenses from $1000 to $500 per month, decrease your spending by $100 each month over five months. This approach will help you stay motivated and adjust to your new budget more easily.

Stick to Your Budget:

Consistency is key. Track your expenses regularly, perhaps weekly or bi-weekly, to ensure you're adhering to your budget. Consider setting a "money date" with yourself to review your finances and make any necessary adjustments.

Creating a budget is an ongoing process, and it may take a few months to find a balance that works for you. Be patient, stay disciplined, and don't be afraid to make changes as you gain a better understanding of your spending habits and financial goals.

Know the different types of investment accounts

Fidelity offers a range of investment accounts to suit different needs and financial goals. Here are some of the main types of investment accounts available:

Brokerage Account

A brokerage account is a standard investment account that offers flexibility and a wide range of investment options. Anyone over the age of 18 can open a brokerage account and there are no contribution limits. You can buy and sell various investments such as stocks, bonds, mutual funds, and ETFs. Brokerage accounts are taxable, meaning you have to pay taxes on any realized investment profits. Fidelity offers a $0 commission on online US stock, ETF, and option trades for its brokerage accounts.

K)

A 401(k) is an employer-sponsored retirement plan that offers tax advantages and high contribution limits. Contributions are made pre-tax, and taxes are paid only when withdrawals are made. Some employers may also match your contributions up to a certain amount. 401(k)s may have rules and restrictions on investments and withdrawals.

Individual Retirement Account (IRA)

An IRA is a retirement account that you can open and manage on your own, independent of any workplace plans. Traditional IRAs offer tax benefits similar to 401(k)s, with the added flexibility of contributing whenever you want. However, there are rules and restrictions on eligibility, contribution limits, and withdrawals. Fidelity offers a Roth IRA, which provides tax-free growth and withdrawals once certain conditions are met.

Cash Management Account

A cash management account combines the features of a bank checking or savings account with the flexibility of a brokerage account. It offers check writing, bill payment, a debit card, and investment options. Fidelity's cash management account has no fees or minimums and offers competitive rates of return.

SEP IRA

A Simplified Employee Pension Individual Retirement Account (SEP IRA) is designed for self-employed individuals and small business owners. It offers tax-deductible contributions, easy setup, and high contribution limits. Withdrawals before age 59½ may be subject to taxes and penalties.

Solo 401(k)

A solo 401(k) is a retirement account for self-employed individuals or small business owners with no employees (except their spouses). It allows for both employee and employer contributions, providing tax benefits and a wide range of investment options. There are limited eligibility and withdrawal restrictions.

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement savings account for self-employed individuals or small businesses with fewer than 100 employees. It offers tax benefits for both employees and employers, easy setup, and a wide range of investment options. Early withdrawals may be subject to penalties.

Health Savings Account (HSA)

An HSA is a tax-advantaged savings account for eligible medical expenses. It offers triple tax benefits: tax-deductible contributions, tax-free withdrawals for qualified medical expenses, and tax-free investment growth. After age 65, HSA funds can be used for non-medical expenses without penalty, but income tax applies.

529 Plan

A 529 plan is a tax-advantaged investment plan for future education expenses, including K-12 tuition, room and board, books, and technology expenses. It offers tax-free withdrawals for qualified education expenses and broad flexibility. Non-qualified withdrawals may be subject to taxes and penalties.

Fidelity Youth® Account

The Fidelity Youth® Account is a brokerage account for teens aged 13 to 17, supervised by their parents or guardians. It offers free opening, the ability to invest with just $1, learning content, and parental notifications. While there are no tax advantages, it helps teach teens financial skills and safe investing practices.

UGMA/UTMA Brokerage Account

A UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act) brokerage account is a custodial account for adults to save and invest for minors. There are no contribution limits, and adults can transfer various assets to the account. The minor gains control of the account and its assets upon reaching adulthood. Tax considerations and financial aid impact may apply.

Roth IRA for Kids

A Roth IRA for Kids is a tax-advantaged retirement account for children under 18, managed by an adult custodian. It offers tax-free growth and withdrawals, emergency access to contributions, and a head start on retirement savings. The child must have earned income to contribute, and there are contribution limits.

Learn about diversification

Diversification is a key aspect of investing and risk management. By spreading your investments across different areas, you can reduce the impact of any single investment's failure on your overall portfolio. Here are some things to keep in mind about diversification:

• Different Types of Investments: Diversification involves allocating your money across various types of investments, such as stocks, bonds, mutual funds, real estate, and commodities. Each type of investment has its own risks and potential returns, so it's important to understand them before making decisions.
• Asset Allocation: Diversification is not just about investing in multiple stocks or bonds. It's also about allocating your investments across different asset classes, sectors, and companies. For example, investing in a mix of stocks, bonds, and cash can help reduce the overall risk of your portfolio. Additionally, investing in different sectors like technology, healthcare, and finance can further diversify your portfolio.
• Risk Management: Diversification is a powerful tool for managing risk. By not putting all your eggs in one basket, you decrease the chances of losing money if a particular investment or sector performs poorly. It's important to regularly review and rebalance your portfolio to maintain your desired level of diversification and risk management.
• Mutual Funds and ETFs: Mutual funds and exchange-traded funds (ETFs) are great options for beginners to achieve diversification. These funds are managed by professionals and invest in a diverse range of stocks or bonds, providing instant diversification for investors. However, they may come with higher fees.
• Alternative Investments: Alternative investments like real estate, commodities, private equity, and hedge funds can provide further diversification and potentially higher returns. However, they also come with higher risk and may require a larger investment.
• Investment Minimums: When diversifying your portfolio, consider the investment minimums of different funds and investment options. Some funds have higher minimum requirements, making them inaccessible to small investors. Look for funds with minimums that align with your investment budget and goals.
• Research and Education: Before diversifying your investments, it's crucial to educate yourself about the different options available. Research various investment types, their risks, and their potential returns. Online platforms like Investopedia, financial news sources, and books can be excellent resources for learning about diversification.
• Seek Professional Advice: If you're unsure about how to diversify your portfolio effectively, consider consulting a financial advisor. They can provide personalized advice based on your financial situation, goals, and risk tolerance.

Remember, diversification is a long-term strategy that can help you manage risk and maximize returns. It's important to stay informed, be patient, and regularly review your portfolio to ensure it remains aligned with your investment goals.

Frequently asked questions