Table of Contents
- 1 How to Start Investing With Fidelity Index Funds.
- 1.1 Fidelity Index Funds for Beginners
- 1.1.1 1. What Criteria to Look For in Fidelity Index Funds
- 1.1.2 2. The Best Fidelity Index Funds List
- 1.1.3 3. How to Buy Fidelity® Index Funds and In What Amounts?
- 1.2 Conclusion
- 1.1 Fidelity Index Funds for Beginners
How to Start Investing With Fidelity Index Funds.
In this article today we’re talking about fidelity index funds, especially for beginners. I’m gonna talk about which of Fidelity’s index funds are the best ones to invest in and show you how and where to buy them.
There’s an article I did earlier on stock investing for beginners. In that article my primary focus was how to find the best company stocks and investing in them for profit long-term, but we briefly touched on index funds. You can read this article here.
Index funds are a great way to get started investing safely without doing hours and hours of research on individual stocks. They’re the best way to create a diversified investment portfolio that grows your money big time over the long run.
Fidelity Investments is known for being one of the most reputable low-cost index fund providers.
I also happen to be a longtime user of Fidelity. I know the platform inside out and understand what I’m sharing with you.
So here’s what we’re going to talk about:
- The most important criteria to look for before investing in Fidelity index funds.
- A list of the best fidelity index funds that meet this criteria, and…
- How to buy them including how much to buy and in what combination.
What is an index fund?
First off I don’t want to assume anything so allow me to explain what an index fund is before I get into all the other stuff listed above. An index fund is a pooled investment vehicle that gives you an instant slice of ownership in hundreds of different companies in one easy purchase.
The reason why it’s called an index fund is because the stocks in the fund are chosen by an index rather than by some super smart overpaid money manager. Examples of indexes you might have heard of are the S&P 500, the NASDAQ and the Dow Jones.
So the S&P 500 index fund will have 500 stocks that are in the S&P 500 index. The Dow Jones index fund will have the 30 stocks that are in the Dow Jones index.
Fidelity Index Funds for Beginners
1. What Criteria to Look For in Fidelity Index Funds
There are three things you need to know when considering which criteria to use when choosing index funds.
1. Expense Ratio
When looking for fidelity index funds and index bonds in general, there’s a of things you want to look at when buying any index fund. The first thing is the expense ratio. The expense ratio is how much money is being skimmed off the top from your investment every year.
In other words it’s an annual fee for investing in the fund. If you want to avoid paying this fee your only other alternative would be to go out and buy every single stock in the fund yourself. Obviously that is not feasible.
So certainly you shouldn’t mind paying a fee to the index fund to do all that work for you. That being said you want to keep this fee as low as possible. A good rule of thumb is to look for an expense ratio of under 0.2%.
For example let’s look at the Fidelity Total Market Index Fund or SFKAX. If you invested $1,000 in this fund you’d pay an annual fee of only 15 cents. Peanuts, right? However, there another index fund called the Fidelity Women’s Leadership Fund or FWOMX, your annual fee would be 1.12% or $11.20 a year.
It doesn’t sound like a huge difference but compounded over time a small difference in the expense ratio adds up to hundreds of thousands of dollars. Don’t believe me check this out.
This chart shows you the difference that fees make in your investments. A difference of one percent in annual fees reduces your nest egg overtime by a total of $42,000 at the end of 30 years. This is crazy! So when you’re looking to invest in an index fund, the expense ratio is the number one criteria.
To find a fund’s expense ratio, just pull up the funds summary page and look for the section that says Gross Expense Ratio.
Again you’re looking for funds with an expense ratio of 0.2% or less.
2. Automatic Reinvestment of Your Dividends
The second criteria to look for is automatic reinvestment of your dividends. Let me explain. When you invest in the stock market you get dividends monthly or quarterly. Every time you get a dividend deposit you don’t want that cash to just sit there.
You want to use that cash to buy more stocks. That way you can make money on your money. Your dividend buy you more stocks, which in turn pays you more dividends, which you use to buy more stocks and so on and so forth. You get the idea.
That’s called compound interest and goodness me! it’s like the best thing ever. Check the chart below.
This chart shows you difference between reinvesting your dividends and not reinvesting your dividends. If you invested $100,000 to start and then you reinvested your dividends, you’d have over $150,000 today. However, if you didn’t reinvest your dividends you’d only have $80,000.
Bottom line is: reinvest your dividends. The best way to do that is by investing in Fidelity index funds that are mutual funds not ETFs.
Index funds come in two forms: Mutual funds and ETFs. For example you can invest in an S&P 500 mutual funds or an S&P 500 ETF. They’re both index funds and the end result is that you’ll own a slice of the S&P 500 index with either one.
However the only difference is that the S&P 500 mutual fund index fund does automatic dividend reinvestment for you whereas the ETF doesn’t. You don’t get dividend reinvestment with ETFs. So the second criteria to look for when buying index funds is to make sure that it’s a mutual fund not an ETF.
3. Transaction Fees
Transaction fees are whatever the fund charges you to buy into the fund and also to sell out of the fund. Some funds charge you for both, other funds don’t charge you for either and it all depends. Obviously we’re gonna go for the funds that don’t charge you anything right?
The good news is if you have an account at Fidelity you’re not gonna pay any transaction fees to buy any of their mutual funds. But if you have an account at Vanguard for example, they’ll probably charge you stay like $50 or something crazy if you want to buy a Fidelity fund.
So again transaction fees aren’t a concern for you if you’re buying in-house funds. In other words you have a Fidelity account and you’re buying Fidelity funds. However, outside of that you’ll probably deal with some hefty transaction fees.
2. The Best Fidelity Index Funds List
Now for the best fidelity index funds. First of all these are all mutual funds. So no ETFs on this list. And secondly, in this list, the funds is not an explicit recommendation to buy. It’s just a resource to help you jump-start your research. So with that disclaimer out of the way, here we go.
For domestic stocks, the Fidelity Total Market Index Fund (FSKAX) has an expense ratio of 0.015%.
For international stocks, the Fidelity International Index Fund or FSPSX, is a good way to go.
For emerging market stocks, you can check out for Fidelity Emerging Markets Index Funds or FPADX. This has an expense ratio of just 0.075%.
For US government bonds, the Fidelity Intermediate Treasury Bond Index Fund has an expense ratio of 0.03%.
For inflation-protected bonds, the Fidelity Inflation-Protected Bond Index Fund or FIPDX, is a good one to look at as well.
For real estate, the Fidelity® Real Estate Index Fund (FSRNX) has an expense ratio of 0.07%.
As you can see Fidelity is not that creative with their index fund names. It’s pretty straightforward.
3. How to Buy Fidelity® Index Funds and In What Amounts?
Now want to turn our attention to the steps you need to take to buy these index funds. Once you decide which funds you want to buy, the rest is super easy.
- I’m assuming you’re logged in to your Fidelity account
- You just type in the ticker symbol in the search bar pull up the fund summary page.
- Then click BUY.
- In the little trade window that pops up you’ll see that you need to specify a dollar amount.
- All the funds mentioned here don’t have any investment minimums, so you can literally buy one dollar if that’s all you have.
Now let assume you have more than $1 to invest. The big question you need to ask yourself is how much to buy of each fund?
In other words what asset allocation you want. Asset allocation is the particular mix of investments that you have in your portfolio. It’s the number one decision you need to make before you pull the trigger on any of these Fidelity index funds.
For example, if you have $10,000 of investments and $5K is in stock funds and the other $5K is in bond funds, then your asset allocation is 50% stock and 50% bonds.
Generally the longer your time horizon, the more you want to have in stocks. It’s also a good idea to mix in other asset classes like real estate in order to make your portfolio as bulletproof as possible throughout any economic conditions.
The most basic asset allocation is doing a split between stocks and bonds. Jack Bogle, the founder of Vanguard and also considered to be the top dog of index funds and here’s his recommendations when it comes to index funds.
He recommends subtracting your age from 100 and owning that much in stocks. So if you’re 30 years old, you’d own 70% in stock and 30% in bonds.
If you’re investing $10k into Fidelity index funds, then you could buy $7k of Fidelity Total Market Index Fund (FSKAX) and $3k of Fidelity Intermediate Treasury Bond Index Fund (FUAMX).
Here’s a slightly fancier asset allocation, recommended by David Swensen, who’s the legendary manager of Yale’s endowment fund. He helped Yale grow its endowment fund from $2b to $27b over the last 34 years.
When a person with that much wisdom and know-how recommends something, I would not think twice about it. Whatever he recommends is gold in my opinion.
He recommends the following asset allocation:
David Swensen’s recommendation:
30% in Domestic Equity.
15% in International Equity.
10% in Emerging Markets.
15% in U.S. Treasuries.
15% in inflation-protected U.S. Treasuries.
and 15% in Real Estate.
So if you have $10,000 to invest and you’re using Fidelity index funds, your portfolio would have 6 different funds in it and look something like this:
So here are top three things you now know about Fidelity index funds investing:
- You know what criteria to look for when investing in Fidelity index funds.
- You also have a list of the best Fidelity index funds that meet this criteria we talked about.
- You also know how to buy the index funds and how much to buy of each.
Investing doesn’t have to be hard or complicated. Index funds are the best way for a beginner to start if you’re sitting on some cash and you want to start putting your money to work. I highly recommend choosing one of these asset allocations and getting started ASAP with Fidelity index funds.
A lot beginner investors have a lot of reservations about getting started. But the key here is to start now perfect later. Everyday you wait is another day when your hard-earned money isn’t working for you and most probably working for your bank. If you want your money to work for you, it’s not by putting it in an ordinary savings account.
Do you have any questions, comments or recommendations? Feel free to reach out to me via the comments section below. Also, I encourage you to share this information about Fidelity index funds with your friends and family. There are so many people out there who don’t know this type of information and I think they will find really useful. Thank you.