Following Our Models

Many of our subscribers tell us that our model portfolios are the main reason they sign up. We offer five different no-load portfolios with a wide range of investment options. Performance figures and current holdings are provided in our monthly issues (on page 2), and we also give weekly updates on performance in our hotline emails (which are also posted on our website).

Getting started with one or more of our model portfolios is straightforward. If you have an existing account with Fidelity, you can match the results of a particular model portfolio simply by holding the same mix of funds. You should first read the prospectus for each fund, and you'll need to calculate the dollars that go into each fund based on the model percentages. After that, you can simply place the trades with Fidelity.

Be aware that in a taxable account you may incur capital gains on any profitable positions you sell when joining up with a model portfolio. This is not an issue if you plan to use a retirement account.

If you are getting started with Fidelity for the first time, it might be easier to start with a money market fund (such as Government Cash Reserves) and then exchange into the model holdings once your account is active.

Once you establish a starting position, you'll need to check our monthly issues and weekly hotlines for any trades. If we make any moves, they'll be highlighted on page 3. At times you may notice that our model mix will shift by a small percentage even when there are no switches. This simply reflects changes in the market value of the funds that are held.

Following is a description of the characteristics for each model portfolio, along with some guidelines that can help you decide how to allocate between them.

INCOME MODEL
Our Income Model is our least risky portfolio and is the best choice if you want to minimize the risk of loss in a short-term market decline. We aim to keep risk about 1/3 as great as the S&P 500. Over the 32 year period ending 12/31/23, the Income Model returned 5.1% per year (see chart).

For investors in Fidelity's PRA Annuity, we provide an annuity version of the Income Model in each issue on page 10.

GROWTH & INCOME MODEL
Our Growth & Income Model is a good match for investors wanting conservative growth with reduced exposure to bear markets. It's also a good choice if you want quarterly dividends which will grow over time, although the portfolio's income stream alone is not as high as our Income Model.

In this portfolio we aim to keep risk about 2/3 as great as the S&P 500 index. For the 30 years ending 12/31/23, the model provided an annualized return of 8.3% (see chart).

Although our Growth & Income Model is less risky than the S&P 500 index, the risk of short-term losses is still significant. You should be willing to ride through a selloff to achieve long-term growth. We suggest a minimum investment horizon of at least five years.

We provide an Annuity version of this model on page 10 of each monthly issue.

GROWTH MODEL
Our Growth Model aims for long-term growth by investing in stock funds that focus mainly on the U.S. market. We try to keep risk similar to the S&P 500. For the 37 years ending 12/31/23, the Growth Model returned 11.4% per year (see chart). The S&P 500's annual return for the same period was 10.7%.

One of our guiding principles with the Growth Model is to remain fully invested in domestic stock funds. There are several reasons why we don't attempt to time the market:

• Long term stocks go up. The S&P 500 index has grown at about 10% per year (with dividends reinvested) since 1926. You don't need to time the market for long-term growth.


• Timing the market looks simple in hindsight, but the odds favor a fully invested position. Stocks move up two-thirds of the time, so a cash position has only a 33% chance of beating the market. Any investment approach that frequently moves in and out of cash is likely to lag the market over any long period of time. Holding cash can reduce risk, but it rarely adds to long-term performance.


• Studies have shown that perfect fund selection produces far better results than perfect market timing. In the real world, this means that a strategy which tries to pick good funds has more opportunity than one which tries to be in the market at the right time.

Our Growth Model concentrates on Fidelity's domestic stock funds, a group that benefits from Fidelity's extensive research capabilities. Because of the inherent risks of investing in stock funds, you should not follow the Growth Model unless you have a long-term investment horizon (10 years or more).

If you are moving into the Growth Model from a cash position, consider joining up over time. Divide the amount to be invested by eight and then make purchases once per quarter over a two-year period. This "dollar cost averaging" approach can work to your advantage because more shares are purchased when stock prices take a temporary dip. In the event of a bear market, you are able to buy at significantly lower prices with some portion of your investment. Dollar cost averaging can help reduce the risks of establishing a growth-oriented position in mutual funds.

In order to strive for long-term capital gains, we aim for an 12-month holding period on profitable positions. The Growth Model can also be followed in a retirement account such as an IRA or Keogh.

We provide an Annuity version of this model on page 10 of each monthly issue.

SELECT MODEL
The Select System is our best long-term performer. We invest in a mix of industry groups that we believe are poised to outperform the S&P 500 over the long run.

We aim for an overall risk level that's 20% greater than the S&P 500. Actual performance from 12/31/88 to 12/31/23 (a period of 35 years) was 13.2% per year, versus 10.7% for the S&P 500 (see chart). When following the Select System, we suggest that you use only long-term capital that is not needed for 10 years or more. Over the long run, the Select System may post a higher return than our other model portfolios -- but it sometimes takes on more risk and could lose more than our other model portfolios in a downturn.

We provide an Annuity version of this model on page 10 of each monthly issue.

UNIQUE OPPORTUNITIES MODEL
This model aims to profit from turnaround situations and other opportunities where Fidelity may have an advantage over its peers.

We take somewhat of a contrarian approach -- looking for a chance to do well in places where most investors don't appreciate the potential for growth. Retirement accounts are a better choice here, as we may sometimes book short-term capital gains. We recommend you use only long-term capital that is not needed for 10 years or more. We typically aim for a risk level that's 20% greater than the S&P 500.

Between 3/31/99 and 12/31/23 (24.75 years) the model returned 9.9% per year, versus 7.4% for the S&P 500 (see chart).

ALLOCATING BETWEEN OUR MODELS
When deciding how to allocate your investment among our five regular models, there are two things to consider. The first is your tolerance for risk, and the second is the length of time before you will need the money. The table below suggests a starting point based on these two factors.

To use this approach, first consider your tolerance for risk. Rate yourself "Low" if protecting your portfolio against losses is a key priority. Choose "Medium" if you don't like losses but you can accept a short-term decline to improve your long-term return. Go with "High" if you want to maximize long-term returns and the prospect of riding through a major bear market does not bother you.

Next, make a rough estimate of your living expense needs in each of the next 10 years, and subtract out what you expect to receive in wages, social security, and other income sources unrelated to your investments. The result should be an estimate of how much cash you'll need from your investment portfolio (if you are still working or if you have income from non-investment sources, you may not need any money from your investments). Finally, add up your needs in each category to determine the proper allocation. The total for the first five years should be invested according to the column on the left. The money required in years six through 10 should be invested in the model portfolio in the middle box. The remaining portion of your portfolio, which may be the entire amount for some, is allocated to the "10 years or more" box.

Here are two examples:

1. Mike and Lori have saved $100,000 for their retirement which begins in about 22 years. They consider their risk tolerance to be high, because they are willing to ride through a bear market in the pursuit of maximum long-term gains. In this case the couple could elect to follow the lower right category and put all their money into the Select System, or Unique Opportunities Model.

2. Ron and Cathy are retired and have savings of $2,000,000. Living expenses are expected to be about $80,000 per year over the next 10 years. The couple considers their risk tolerance to be low. In this example the couple could put $400,000 in the "less than 5 years" column, which would be invested in a money market fund. Another $400,000 of expenses would land in the "5-10 years" column, which would be invested in the Income Model. The remaining $1,200,000 would fall in the "10 years or more" column and should be invested in the Growth & Income Model. Although the income stream alone may not cover living expense needs, the couple can be comfortable using some of their principal to make up the difference, since the total draw on the portfolio is likely to be under 4% per year. Assuming long-term investment growth of 5-6% per year, chances are good the portfolio will continue to climb in value even as it provides for living expenses.

When using this approach you should re-allocate your mix annually to keep up-to-date with changes in your financial situation. For example, as retirement draws near your overall risk will normally be reduced. This approach will do exactly that as living expenses are recognized. And if you rebalance when you file your taxes, it makes for a convenient time to sell some holdings to satisfy the tax bill and provide for the expected living expenses in the year ahead.