[Editor's note: This was first published by the Wall Street Physician, a fellow physician blogger. He used to work on Wall Street but then saw the light and moved into medicine. He has some great information on his site and I often reference it when making financial decisions. I actually used this post to determine my asset allocation and set up my three-fund portfolio. I hope you find it as useful as I do. The original article is found here.]
One of the most popular posts on the blog so far has been my article describing how you can build simple index fund portfolios, including my favorite three-fund portfolio, using Vanguard index funds. Using the funds from that article, you can build a diversified portfolio of index funds at very low cost using Vanguard funds.
Unfortunately, many of my readers do not have a Vanguard account. Some may choose to have accounts at their largest competitor, Fidelity. I personally do not have a Vanguard account and have all my investments (except my 529 and HSA) at Fidelity. I like their phone customer service, and they have physical branches whenever I want to deposit checks or talk to a customer service representative in-person. In addition, Vanguard and Fidelity have been recently engaged in a competitive price war over index fund expense ratios. In many cases, Fidelity’s index fund is cheaper than Vanguard’s equivalent offering.
Whatever your reason for choosing Fidelity over Vanguard, I wanted to show you how to build three-fund or other simple index fund portfolios with Fidelity.
One Fund: Start with S&P 500 or Total Stock Market
The simplest portfolio consists of just one index fund. You can choose an S&P 500 index fund, which consists of large-cap stocks, or a total stock market index fund, which consists of large-cap, mid-cap, and small-cap stocks.
Fidelity’s S&P 500 index fund is FUSVX (ER 0.035%), and their total stock market index fund is FSTVX (ER 0.035%).
If you use ETFs, Fidelity’s S&P 500 ETF is IVV (ER 0.04%), and its total stock market ETF is ITOT (ER 0.03%).
Two Funds: Add U.S. Bonds
Most investors will want some exposure to U.S. Bonds because a 100% stock portfolio has a lot of volatility. At Fidelity, the index fund of choice to get broad U.S. bond exposure is FSITX (ER 0.045%). If you use ETFs, the commission-free iShares ETF is AGG (ER 0.05%)
Three Funds: Add International Stocks
The third component of the classic three-fund portfolio is international stocks. You have three great international stock index fund options at Fidelity.
The first option is Fidelity International Index Fund – Premium Class (FSIVX, ER 0.06%). This index fund gives broad exposure to foreign stocks in developed markets, such as Europe and Japan. It does not give exposure to emerging markets, like Russia or China. It also has minimal exposure to mid-cap and small-cap stocks.
The second option is Fidelity Global ex U.S. Index Fund – Premium Class (FSGDX, ER 0.1%). This index fund gives exposure to both foreign developed markets and emerging markets. Emerging markets can provide additional diversification, but they are typically more volatile than foreign developed markets. It also has minimal exposure to mid-cap and small-cap stocks.
The third option is Fidelity Total International Index Fund – Premium Class (FTIPX, ER 0.1%). This index fund gives the broadest exposure to the international stock markets, as it includes foreign developed markets and emerging markets as well as large-cap, mid-cap, and small-cap exposure.
I personally prefer FSIVX because of its lower expense ratio, but I know many people like FTIPX because it gives exposure to emerging markets and small-cap international.
If you like ETFs, the commission-free iShares ETF for international stocks is IEFA (ER 0.08%). This ETF tracks foreign developed markets and does not invest in emerging markets.
Four Funds: Add International Bonds
Fidelity currently does not have an international bond index fund. To get exposure to international bonds at Fidelity, you should use the IAGG (ER 0.09%), an iShares ETF that is commission-free at Fidelity.
Five Funds: Add REITs
If you want to add a fifth fund, my preference is to add a real estate index fund. At Fidelity, the best option is the Fidelity Real Estate Index Fund – Premium Class (FSRVX, ER 0.09%). If you use ETFs, the commission-free Fidelity ETF is FREL (ER 0.084%).
|One-Fund: S&P 500||FUSVX||IVV|
|One-Fund: Total Stock Market||FSTVX||ITOT|
|Two-Fund: Add U.S. Bonds||FSITX||AGG|
|Three-Fund: Add International Stocks||FSIVX
|Four-Fund: Add International Bonds||N/A||IAGG|
|Five-Fund: Add REITs||FSRVX||FREL|
Remember that you should use ETFs instead of index funds in a Fidelity taxable account because of the more favorable tax treatment of ETFs. In tax-deferred accounts, you can use either index funds or ETFs, and my preference is to use index funds. Also, if you do not have $10,000 to invest in the Fidelity Premium Class index fund, then I would recommend the equivalent commission-free ETF, which has no minimum investment.
What do you think? Do you prefer Fidelity over Vanguard? Do you own any of the Fidelity index funds or ETFs listed in this article?