Many individual investors need and want the simplicity and ease of building a portfolio with mutual funds. And to make it even easier (and potentially less costly), by concentrating with a specific fund company, the process gets even better.
The privately held Fidelity is one of the go-to mutual fund families that has been in the market since 1946 and has some $2.5 trillion in assets under management (AUM). It has a wide selection of funds that provide specific exposure to market segments in stocks and bonds. That makes it ideal to build a balanced portfolio for growth and income over time in a one-stop shop.
My general view for the stock and bond markets is that the sustained economic growth, if perhaps moderated from last year, will support further general improvements for the overall markets. Specific sectors will benefit even more. And while trade negotiations are adding some risks and potential hinderances to the U.S. economy and markets, I continue to see that there are plenty of positive underlying developments this year and into next.
But the key to a lower-risk portfolio for growth and income is to balance between stocks and fixed income. And right now, this is best done at a ratio of 56% for stocks and 44% for fixed income and cash, which is how I have weighted the model portfolios of my Profitable Investing.
Now, let me lead you down my preferred allocation process for the best of Fidelities funds for stocks and fixed income.
Fidelity Funds for Overall Stocks
For stocks, I am maintaining a weighting in the general stock market that is largely represented by the general S&P 500 Index. And in the mutual funds and ETFs, when possible, having a bit more dividend payersis a good, conservative means of investing for the longer haul. This brings less volatility and some downside protection for when the market slips as it will. This starts with the Fidelity High Dividend ETF (NYSEARCA:).
In addition, with growth challenges for now outside the U.S., I am focusing stock allocations within the U.S. This market represents the best value for growth and income for now.
Then there are the individual sectors in the U.S. stock market which have been and should continue to deliver better prospects for growth and income with less risk — including trade risks.
These start with real estate investment trust (REITs). The REIT market has been quite good over last year and so far for this year. It provides the benefits of properties that gain from the economy creating and maintain demand, which bolsters the underlying values. And it also provides the higher dividend income that has provided a cushion when the general stock market drops. And Fidelity provides an excellent fund in the Fidelity Real Estate Investment Fund (MUTF:FRESX).
Bloomberg US REITs Index Source Bloomberg
Next is the utilities market.
Like REITs, utilities benefit from the combination of underlying economic values improving and higher dividend income. Utilities generally are structured as combinations of regulated and unregulated businesses. The regulated businesses have set rates of return that are negotiated with state and local public utility commissions (PUCs). This provides the security of dependable income and a return on investment that gradually should bolster utilities’ stock values while pulling in dependable income.
S&P 500 Utilities Total Return Index Source Bloomberg
The unregulated businesses provide utilities to capitalize on expanded local, regional or national markets for essential services from power to natural gas and even communications. The impact of the unregulated business is to bolster overall company and stock values with potentially even higher dividend income. Fidelity provides a great way to gain access to the growth and income from the utilities market sector with its Fidelity Select Utilities Fund (MUTF:FSUTX).
Technology is one of the big growth engines for the markets and must be part of any portfolio allocations. And in this space, I’ve seen the continued shift by the leading companies to move their business models from over-reliance upon one-off unit sales to recurring revenue producing businesses. This means the successful technology companies are those that combine the latest hardware with services and contracted subscriptions.
S&P 500 Information Technology Index Source Bloomberg
This has the benefit for consumers (both businesses and individuals) of making it easier and more efficient to have the best tools and services at reasonable and budget-friendly costs. And for the companies, it makes it easier to make customers stickier and revenues to be more predictable while allowing for better longer-term planning for new products and services. As investors, we get more reliable stocks and more income from the growth segment of the market.
Fidelity provides great exposure to the best in technology in its Fidelity Select Software & IT Services Fund (MUTF:FSCSX).
Energy is another of the growth segments of the market that comes with lots of income. Oil and gas continue to be an important part of the U.S. economy. Technology deployment continues to result in more efficient, lower-cost production. And with expanded pipelines and related infrastructure, more of the oil and gas is being unlocked and flowing both domestically and now for export.
S&P 500 Energy Index Source Bloomberg
And along the way, the leaders in this market sector are gaining in revenues, which in turn is driving more dividend income. Fidelity provides a great fund opportunity for this segment with its Fidelity Select Energy Portfolio Fund (MUTF:FSENX).
Last in the market segments is healthcare. This is one of the largest segments of the U.S. economy as a percentage of gross domestic product (GDP). It has been expanding, and that growth is expected to accelerate into the coming years. The U.S. has an aging population and demographics that are more unhealthy, bringing the need for healthcare — from drugs to services and other care — to ever-greater levels.
S&P 500 Health Care Index Source Bloomberg
And while there are political chants for nationalization of basic healthcare, I see little deliverable prospects for upending the core private sector industries. Fidelity has its healthcare focused fund in the Fidelity Select Health Care Fund (MUTF:).
Income generating investments have always been at the core of my research and recommendations. And I’ve had decades of experience in the bond markets, from trading to asset management. This has continued in my writings and newsletter recommendations inside Profitable Investing.
I view bonds and related investments not just as a shock-absorber for stocks, but as opportunities for income and growth. I continue to analyze credit conditions, supply and demand for issues and, of course, inflation and monetary policies to come up with strategies that will capitalize on obtaining risk-controlled higher yield with opportunities for underlying appreciation. And I also work just as I do for stocks — to limit threats as they begin to emerge.
Over last year and into this year, the developments in the bond market continue to favor corporate bonds and preferred stocks as well as the more buoyant and the more credible municipal tax-free market. And with inflation as measured by the broad Core Personal Consumption Expenditure Index (PCE) remaining subdued, the Federal Reserve and its Open Market Committee (FOMC) should remain neutral in policy. That’s good for fixed income.
The U.S. economy expanded at a great overall pace last year. And this year, the expectations are for further growth, if perhaps at a somewhat slower pace. This means more spending by consumers, which turns into more revenue for companies. And in turn, this means better corporate credit, which drives higher appreciation for corporate bonds by investors.
Bloomberg Barclays US Corporate Total Return Index Source Bloomberg
I like corporate bonds, as they act like stocks. As underlying conditions improve, they improve in price. And along the way, they pay more income. Given the outlook for the markets, I am recommending the Fidelity High Income Fund (MUTF:SPHIX) for bonds including corporates.
Preferred stocks, also known as preferreds, are another form of corporate bonds. They look and trade like stocks, but they come with a call on assets just after bonds if something goes wrong. And they also come with reliable dividend flows that are typically fixed for investors. I like preferreds as a good blend of equity participation with improving credit and ample dividends.
S&P Preferred Stock Index Source Bloomberg
The one downside to preferreds is that they don’t trade as often and with as much volume as common stocks. This makes mutual funds and ETFs ideal to gain access to good collections or representations for individual investors. I am recommending the allocation to preferreds with the Principal Preferred Securities Fund (MUTF:PRFCX) that can be bought inside a Fidelity account.
Note that the Preferred Fund has an early redemption charge of 1%, but I see this as a buy-and-own proposition.
Who doesn’t like to get paid by their investments with either less or no taxes owed? The municipal bond market, or munis, provide great tax-advantaged income for investors. And last year and this year, the underlying market for munis has been getting even better. The economy is growing, resulting in more tax and other revenues for muni issuers. That makes them more credible in the bond market. This in turn is bringing muni prices higher. And with low inflation, the payouts are less threatened over the coming years.
Bloomberg Barclays US Municipal Total Return Index Source Bloomberg
And while taxes are down for lower-to-middle-income wage earners, for investors and higher-income earners, tax rates are still high. That makes munis even more advantageous. This in turn is driving more demand. And with less need to issue more, supply favors bond prices adding to the attraction of munis.
I am recommending an allocation with the Fidelity Intermediate Municipal Income Fund (MUTF:FLTMX) which also has an early redemption fee of 0.5%.
Now I’ve presented my favorite way to build a balanced portfolio exclusively with Fidelity funds. For more of my market research and recommendations from mutual funds to individual stocks and bonds, look at my Profitable Investing. Click here to learn more:
Neil George is the editor of and does not have any holdings in the securities mentioned above.
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