Fidelity Investor members, CNBC anchors, members of the World MoneyShow audience and others often ask me the same question:
If I could own only one fund, which fund would it be?
The question is right-minded, aimed as it is at getting me to cut to the chase of my best idea, my absolute favorite top banana of the bunch. Though my preferred portfolio answer is more like a bunch of bananas than just a top pick.
But have no fear. I examine the whole world of Fidelity funds in my Fidelity Investor service, and from that world, I have a top fund pick for you — as well as top growth and income funds to add to your existing 401k mix.
Don’t Buy What Jack Bogle Is Selling
But before I get to my 401k pick(s), I want to review my A.B.L.E. principles of 401k investing:
- Active Management
- Balanced Assets
- Low Cost
- Efficient Diversification
Per active management, don’t buy what Bogle is selling (unless it’s a stellar actively managed Vanguard fund). Good active managers trounce their benchmarks and the index funds that are based on these benchmarks over every measurable and meaningful investment timeline. Fidelity has never had a dearth of such mangers — the trick is finding them.
Then there’s balanced assets. In addition to buying the manager, not the fund, I am a big believer in asset allocation — a key ingredient in getting the best bang for your buck from diversification. There are years when stocks soar past bonds, and there are years when bonds soar past stocks. Generally, the years are a mix of both with a flow that is best approached by having two oars in the water rather than one.
Low cost matters, but it doesn’t trump superior active management. (A fund’s end-of-day net asset value reflects its fees in its return, making it easy to compare an actively managed fund’s benefit versus a passive index fund option.) These days, Fidelity’s actively managed funds are among the lowest-cost funds you can find — many come with price tags that are lower than their ETF or index fund counterparts.
And that brings us to efficient diversification.
Don’t Only Own What Your Fund Company Wants to Sell You
Many 401k plans (and I have reviewed hundreds upon hundreds of them) either offer so many choices that a ringmaster at a circus would be unable to tame them into a functioning portfolio, or they offer so few choices that plan participants are unable to diversify across asset classes, capitalization ranges, investment styles and regions.
Others offer the company plan: a take-it-or-leave-it “lifestyle” or “timeline” of “target” fund that is typically an overflowing basket of the company’s own funds.
I am not a big fan of these one-stop funds-of-funds. Their performance has been spectacularly spotty over the past decade — especially when compared to the track record of not just benchmarks, but competing independent products like the portfolios found in my Fidelity Investor newsletter.
Still, if they’re the only game in your plan’s town, or if they’re the only way to diversify within your plan’s lineup, then they’ll suffice as a better retirement savings vehicle than none.
But if you have the choice, opt for these funds instead.
Funds You Should Buy for Your 401k
My aim is to deliver a lot more than a “will suffice” or “better than none” solution. My top picks for any investor’s 401k plan are:
Fidelity Strategic Dividend & Income Fund (MUTF:FSDIX)
Strategic Dividend & Income is a top pick, whether you can only own one fund (not likely), or as the one fund I’d suggest adding to your existing mix to better cover your growth and income bases.
FSDIX provides lead manager Joanna Bewick a lot of investing leeway: roughly 50% common stocks, 15% REITs or other real estate investments, 15% convertibles and 20% preferred stocks. Foreign investments make up 4.5% of the holdings.
From a sector breakdown, financials (28.6%), information technology (10.7%) and healthcare (10.6%) get the heaviest weights, though the top two individual weights go to energy stocks Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX).
FSDIX has been a stalwart performer for years, ranking in the top five of all category funds in one-, three- and five-year performance, according to Morningstar. Meanwhile, expenses are 0.77%, or $77 annually for every $10,000 invested.
Fidelity Select Health Care Portfolio (MUTF:FSPHX)
Manager Eddie Yoon invests in companies involved in the design, production, sale and servicing of everything under healthcare’s sun — pharmaceuticals, biotechs, medical supplies and technology, hospitals and more. Eddie invests with an eye on the necessary demographic trends of aging boomers here and globally, but he is also keyed into the often overlooked trend of emerging markets minting new classes of consumers demanding not just better food and shelter, but better healthcare products and services.
Top holdings include a little bit of everything, from biopharma outfit Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) to diversified pharma Allergan, Inc. (NYSE:AGN) to devices maker Boston Scientific Corporation (NYSE:BSX).
Lower risk and higher returns are the hallmark of healthcare’s growth stock lot: FSPHX has roughly doubled the S&P 500 over every meaningful time period. And like FSDIX, Fidelity Select Health Care charges 0.77% in fees.
Fidelity Strategic Real Return (MUTF:FSRRX)
Primary manager Joanna Bewick (yup, she also manages FSDIX above) again uses an investment allocation guide for this fund.
Bewick invests in approximately 30% inflation-protected, 25% floating-rate, 25% commodity, and 20% REITs or other real estate investments — all exclusively domestic. The top five bond issuers are the United States Treasury, Fidelity Garrison Street Trust, Simon Property Group Inc (NYSE:SPG), Stanley Martin Communities, and Boston Properties, Inc. (NYSE:BXP).
Think of FSRRX as a kind of a hedge against inflation; correlating more with a basket of commodities (definitely not just oil, but think more broadly of cattle, corn, soy beans, cocoa, coffee) prices than either stocks or bonds, making it a unique diversifier for most 401k portfolios.
FSRRX also charges 0.77% in fees.