I am looking to start a Roth IRA using Fidelity index funds. I am looking at three different funds to spread the investments over. They cover lg, mid, & sm cap index funds. I am 34 yrs old and wanting to get advice on how much of each to allocate.
FXAIX
FSMDX
FSSNX
Is this a good mix approach for allocating investments?
Thank you in advance for any insight!
Welcome @Rdc325!
So, all three of those are fine, low fee index funds. But theyâre all just smaller slices of the same pie. Itâs kind of like saying âI want to collect all the Simpsons characters so Iâm going to buy a Homer, a Marge, and a Simpson kidsâ. But right next to those on the shelf thereâs a âSimpson family complete setâ. When you buy them individually, youâre just adding complexity, and possibly missing out on part of the set (Maggie anyone???)
So back in the non-metaphor world, why buy one set of large companies, one set of medium companies and one set of small companies, when you could just buy one set of ALL companies.
In Fidelity world that would be FSKAX.
As evidence, FXAIX (large cap) contains 509 companies, FSMDX (mid cap) has 815 companies and FSSNX (small cap) has 2,012. Add those together and you get 3,336 companies. FSKAX has 3,428 companies. The slight difference doesnât really matter (possibly due to a small gap between mid and large or who knows), but youâre basically adding complexity for no reason. And one of PFCâs Principles is that âsimple is better than complexâ. i.e. youâll be more rich if you do it the simple way.
THAT said, all three of the index funds you mentioned are exclusively US companies. Some investors think itâs fine to focus 100% of their portfolio on the US, but I personally favor adding an international and bond portion. You could do that by adding FSPSX (international) and FXNAX (bonds).
And to make it EVEN SIMPLER, you can buy all three of those index funds (US, international and bonds) inside a single target date index fund that automatically rebalances and reallocates for you as you age.
Thank you for the great information and feedback. I am very interested in how being invested in That many stocks will help long term. I am new to investing and truly curious as to why the TDI is such a great choice compared to other index fund options. Great content and love what you are doing!
Basically because the market is âefficientâ. That means every stock is constantly being priced based on the sum total of human knowledge. So buying a few stocks doesnât lead to an expected outperformance of the market, rather it increases volatility without increasing expected returns (thatâs a bad trade). But owning EVERY stock guarantees you your fair share of market growth, with minimal volatility (good trade).
This isnât my crackpot theory, Iâm just relating everything told in virtually every classic book on investing, thatâs backed by my own personal experience.
A couple good books on the topic:
Thank you again for your advice. Loving the simpsons metaphorđ