Which Fidelity Funds line up to the Permanent Portfolio asset classes?

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pplooker

Which Fidelity Funds line up to the Permanent Portfolio asset classes?

Post by pplooker » Tue Apr 27, 2010 3:36 pm

This is part research, part curiousity on my part.  Pretend the following rigid rules are in place: all your investments are in a 401k which can only use Fidelity funds, but you can choose from any Fidelity mutual fund offering at least.  Considering that realistically we can find plenty of alternatives if we hold investments outside the 401k, let's pretend also that this is the only way we're allowed to invest by The Powers That Be.

The most problematic one seems to be Gold.  There's not really a gold fund in Fidelity's line up.  There's FSAGX, but it seems to be virtually all stocks in companies that might mine or process gold.  So no, it's not really a gold fund at all.  I think we're out of luck here with Fidelity.

The stocks would seem to be simple enough, with either the Spartan 500 Index Fund or else that and the Spartan international index fund in some combination.

FLBIX is pretty close on the bonds, but it's not quite there.  The average maturity seems to be only 21 years.

FDRXX seems it would be the first cash option.  It's either that or the muni money market fund.  But FSBIX, the short term treasury bond index fund, would probably be my choice for its substitute.

The reason for the inquiry is convoluted, but essentially I'm contemplating some of my tax advantaged space being forced to obey the rules I've set forth.  In reality, I have flexibility to make common sense moves to mitigate these problems (for example I'd probably stick bonds in a Roth where I can buy whatever I like instead of making do with the Fidelity fund, I can hold cash as I bonds, etc.).  About the only thing attractive about this situation is access to the low cost Spartan index fund.

At the same time, I am loathe to give up the tax benefits and to not to hold something in a taxable account unless it's necessary.  I can resign myself to my fate on the gold since there's not as much reason to keep it tax sheltered, but otherwise I feel it's worth my time to find the closest PP analogs so I have options within the 401k.
Last edited by pplooker on Thu May 13, 2010 11:57 am, edited 1 time in total.
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Re: Which Fidelity Funds line up to the PP asset classes?

Post by fnord123 » Tue Apr 27, 2010 3:58 pm

What are people's thoughts about the Fidelity Stable Value Fund for the cash component?

By the way, if you are a U.S. taxpayer, gold is by far the item you most do want to keep in a tax advantaged account.  The only reason not to is if you want to have direct holdings of physical metal (e.g. coins in the safe / safe deposit box).
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Re: Which Fidelity Funds line up to the PP asset classes?

Post by craigr » Tue Apr 27, 2010 4:20 pm

Fidelity actually has some reasonable Treasury Bond/ST Treasury options. Their Spartan Index funds are also good for stock holdings. Overall if I was a Fidelity investor I could build a good Permanent Portfolio minus the gold and do just fine with their funds:

FLBIX - Fidelity LT Treasuries
FSTMX - Fidelity Total Stock Market Index or FSMKX Fidelity Spartan S&P 500 Index
FDLXX - Fidelity Treasury Money Market Fund

Gold can be somewhere else as the gold fund at Fidelity is mining stocks which is not the same as bullion.
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Re: Which Fidelity Funds line up to the PP asset classes?

Post by craigr » Tue Apr 27, 2010 4:23 pm

fnord123 wrote: What are people's thoughts about the Fidelity Stable Value Fund for the cash component?
Better to use their Treasury Money Market fund. It's there and easy to access.

I don't trust anything with the word "Stable" in its name. I'd want to have a really close look at it. Same for any fund with the word "Conservative" in the name.  ;D
By the way, if you are a U.S. taxpayer, gold is by far the item you most do want to keep in a tax advantaged account.   The only reason not to is if you want to have direct holdings of physical metal (e.g. coins in the safe / safe deposit box).
Actually gold is the last thing you want tax-deferred. IMO. It throws off no interest and dividends that need to be sheltered constantly. Yes you have rebalancing taxes, but this comes with any asset. Further, with gold you get to choose when you take those gains. With a mutual fund or bond you don't have a choice as those payments and capital gains can be dumped in your lap whether you want them or not.
Last edited by craigr on Tue Apr 27, 2010 4:26 pm, edited 1 time in total.
pplooker

Re: Which Fidelity Funds line up to the PP asset classes?

Post by pplooker » Tue Apr 27, 2010 4:48 pm

craigr wrote: FDLXX - Fidelity Treasury Money Market Fund
Ah of course!

I guess the question is then, is the Spartan short term treasury fund just as viable?  With an average maturity less than 3 years the underlying paper just seems to be so liquid.

This may never come to pass for me.  But I thought it might help to discuss this in case someone else ever found themselves in this situation.
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Re: Which Fidelity Funds line up to the PP asset classes?

Post by fnord123 » Tue Apr 27, 2010 5:16 pm

craigr wrote:Actually gold is the last thing you want tax-deferred. IMO. It throws off no interest and dividends that need to be sheltered constantly. Yes you have rebalancing taxes, but this comes with any asset.
The problem with gold is that profits in it are taxed higher rate (28%) than the capital gains rate (15%).  So for rebalancing purposes, gold is absolutely the thing to want to have in a tax advantaged account.

I agree that it makes sense to have some of your gold in a regular/non-tax deferred account - maybe 10 or 15% of your total portfolio.  But if you expect to ever rebalance out of gold (e.g. sell some due to gold's increase in value) you should definitely have some in something like a Roth account.
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Re: Which Fidelity Funds line up to the PP asset classes?

Post by craigr » Tue Apr 27, 2010 5:21 pm

pplooker wrote:
craigr wrote: FDLXX - Fidelity Treasury Money Market Fund
Ah of course!

I guess the question is then, is the Spartan short term treasury fund just as viable?  With an average maturity less than 3 years the underlying paper just seems to be so liquid.

This may never come to pass for me.  But I thought it might help to discuss this in case someone else ever found themselves in this situation.
The short term funds have slightly longer duration than a treasury money market (1-3 yrs. vs 6 months or so). If you are OK with slightly more volatility for slightly more return it could be a reasonable trade-off. I usually only recommend this though for those with at least one year's worth of cash reserves on hand in the portfolio to ride out market wobbles.
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Re: Which Fidelity Funds line up to the PP asset classes?

Post by craigr » Tue Apr 27, 2010 5:24 pm

fnord123 wrote:
craigr wrote:Actually gold is the last thing you want tax-deferred. IMO. It throws off no interest and dividends that need to be sheltered constantly. Yes you have rebalancing taxes, but this comes with any asset.
The problem with gold is that profits in it are taxed higher rate (28%) than the capital gains rate (15%).  So for rebalancing purposes, gold is absolutely the thing to want to have in a tax advantaged account.
Well I'm still not sure. I could go many years without needing to rebalance gold. Yet the stocks and bonds are always paying off income that could benefit from being sheltered.

Also, LT capital gains rates are very likely going to return to 25% or higher in the future. So the spread between gold and non-gold cap gains is no longer so vast especially when you consider the income issues as well. Gold really is best held outside tax-shelters if you can put your bonds in there first.

Finally, the 28% is the highest rate taxed. The actual rate is lower because it is based on your marginal income tax rate. So it's usually lower than 28%.
I agree that it makes sense to have some of your gold in a regular/non-tax deferred account - maybe 10 or 15% of your total portfolio.  But if you expect to ever rebalance out of gold (e.g. sell some due to gold's increase in value) you should definitely have some in something like a Roth account.
This may be true, but holding gold in an IRA also defeats some of the purpose of having some gold easily accessible. Overall, I think long term it's best to have bonds and cash in the IRA first (with some cash outside for emergency purporse). Then stocks. Then gold if you have room left.
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Re: Which Fidelity Funds line up to the PP asset classes?

Post by fnord123 » Tue Apr 27, 2010 5:55 pm

craigr wrote:Well I'm still not sure. I could go many years without needing to rebalance gold. Yet the stocks and bonds are always paying off income that could benefit from being sheltered.
I agree that long term bonds throw off income and deserve to be in a tax advantaged account as well.  For stocks, it isn't so clear cut - the average dividend yield has been fairly small (< 2% over the last decade, <5% every year except for 4 of the last 50 years for the S&P 500).  The total market index has even lower yields iirc. 
Finally, the 28% is the highest rate taxed. The actual rate is lower because it is based on your marginal income tax rate. So it's usually lower than 28%.
True, if someone is in a lower tax bracket then the rate is reduced. 25% or 20% is still significantly more than 15%.
This may be true, but holding gold in an IRA also defeats some of the purpose of having some gold easily accessible. Overall, I think long term it's best to have bonds and cash in the IRA first (with some cash outside for emergency purpose). Then stocks. Then gold if you have room left.
Why would you have cash in an IRA at all?  Almost all of the cash funds being discussed throw off almost zero interest and either very little or no capital gains.  If someone was using a more aggressive approach to the PP cash component (e.g. long term CDs with a plan to break them early if rates go up) then maybe cash might make sense in a tax deferred account.

I don't really understand the "gold accessible" point - maybe you mean avoiding counterparty risk? 
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Re: Which Fidelity Funds line up to the PP asset classes?

Post by craigr » Tue Apr 27, 2010 6:12 pm

fnord123 wrote:
This may be true, but holding gold in an IRA also defeats some of the purpose of having some gold easily accessible. Overall, I think long term it's best to have bonds and cash in the IRA first (with some cash outside for emergency purpose). Then stocks. Then gold if you have room left.
Why would you have cash in an IRA at all?  Almost all of the cash funds being discussed throw off almost zero interest and either very little or no capital gains.  If someone was using a more aggressive approach to the PP cash component (e.g. long term CDs with a plan to break them early if rates go up) then maybe cash might make sense in a tax deferred account.
I'm thinking long term here. Most all of my investments are taxable. I try to be exceedingly careful about doing anything that could cause me to pay unnecessary taxes. At the same time, I also acknowledge that taxes are just a part of our current system and can't be avoided completely.

It is true that right now interest rates are low. But that is not guaranteed forever. It is also true that right now capital gains rates are low, but I know historically they will go up again. So I try to consider what is happening now. However, I also try to anticipate likely tax impacts in the future and make sure I don't have to re-swizzle a portfolio and pay even more taxes trying to fix something that could have been prevented.

For instance on the Diehards forum several years back the high dividend funds were all the rage. One of my posts I warned that when the favorable tax rates on dividends reverted back to ordinary income levels people buying these funds were going to be really sorry. And sure enough they are starting to get posts about this very thing. The people that bought those funds may even have some gains in them making the situation now one of not only having a fund that is going to be spilling over a lot of unnecessary dividends but now if they sell out they could also be hit with capital gains taxes. My solution was much simpler: Just buy the total stock market fund which is very tax efficient already so you don't have to touch it again.

I think it's very important when looking at a portfolio to view the assets as things you may hold for decades. Investors want to limit how often they are in there messing around with them because each time they are touched Uncle Sam wants a piece of the action.

I don't really understand the "gold accessible" point - maybe you mean avoiding counterparty risk?  
Yes. And just being able to liquidate or get ahold of the assets quickly in some type of emergency. American Eagles are legal to hold in an IRA, but they must be held by the IRA custodian. They are not easily accessed if needed as opposed to being in a bank safe deposit or even another gold depository service.  
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Re: Which Fidelity Funds line up to the PP asset classes?

Post by fnord123 » Tue Apr 27, 2010 7:00 pm

craigr wrote:I'm thinking long term here. Most all of my investments are taxable. I try to be exceedingly careful about doing anything that could cause me to pay unnecessary taxes. At the same time, I also acknowledge that taxes are just a part of our current system and can't be avoided completely.
I agree that avoiding taxes is a good thing (within the limits of the law of course!)  
It is true that right now interest rates are low. But that is not guaranteed forever. It is also true that right now capital gains rates are low, but I know historically they will go up again. So I try to consider what is happening now. However, I also try to anticipate likely tax impacts in the future and make sure I don't have to re-swizzle a portfolio and pay even more taxes trying to fix something that could have been prevented.
I don't see the tax concern you are seeing - maybe it is because I am coming from a point of view that I am still in the accumulating phase.  The way I see it, I can freely swizzle stuff around in the tax advantaged accounts I have, making them a perfect place for both high tax income generating assets (currently, treasuries), and high tax rebalancing assets (gold).  I intend to keep swizzling the stuff in my tax advantaged assets to always ensure the highest tax bracket stuff is in the tax advantaged acct wherever possible.  If this swizzling causes me to need to buy more of some other asset to maintain a 25/25/25/25 split, I can buy more of those low tax assets in my non-tax advantaged accounts (and buying assets doesn't cause taxable events).
I think it's very important when looking at a portfolio to view the assets as things you may hold for decades. Investors want to limit how often they are in there messing around with them because each time they are touched Uncle Sam wants a piece of the action.
Except Uncle Sam doesn't get a piece of the action when I sell stuff in my Roth IRA or 401k.
Yes. And just being able to liquidate or get ahold of the assets quickly in some type of emergency. American Eagles are legal to hold in an IRA, but they must be held by the IRA custodian. They are not easily accessed if needed as opposed to being in a bank safe deposit or even another gold depository service.
I'm not advocating one puts all of ones gold in any sort of ETF (tax advantaged or otherwise).  However, having some in a tax advantaged ETF (or gold coins in an IRA) doesn't hurt, unless one believes that one will need 100% of ones gold holdings.  Isn't it equally likely that someone would need 100% of their cash holdings?  In that case, putting cash in the 401k/IRA/whatever makes no more sense (and arguably less - cash has been more useful than gold for immediate transaction needs for the last 250 years or so in the US at least).
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Re: Which Fidelity Funds line up to the PP asset classes?

Post by craigr » Tue Apr 27, 2010 7:14 pm

Eventually if you are saving enough you will find that the maximums that the US Govt. allows you to put in your retirement plans may not be enough. At that point you'll probably have a combination of both tax-deferred and taxable. Until then I say re-swizzle all you want, but still keep some emergency funds outside just in case you need to access them penalty-free.

However once you cross a threshold where you find that you have some money that can't be dumped into tax-deferred savings (like bonuses, inheritance, paycheck savings, other investment profits, etc.) you should be exceedingly careful in how you setup the taxable vs. tax-deferred holdings. You really don't want to go back and re-do a bunch of stuff a few years later.
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Re: Which Fidelity Funds line up to the PP asset classes?

Post by pplooker » Wed Apr 28, 2010 8:45 am

RE: the 28% collectibles tax.

Be careful in making decisions based on this assumption, for while it's true now that the 28% tax is significantly higher than the LTCG tax, let's remember that LTCG are set to be taxed at 20% very soon, and at some points in the past collectibles were taxed as low as 10% for some taxpayers.

The point being that while it's good to weigh rates into your decisions while they're in effect, let's not go forward assuming that tax rates will always be that way.
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Re: Which Fidelity Funds line up to the PP asset classes?

Post by KevinW » Sun May 02, 2010 11:15 pm

Some thoughts from outside the box:

1) Use an individual IRA to hold all the gold.  If you max out a 401(k) and IRA, the IRA will be more than 25% of your contribution limit, so this can work OK.

2) Hold the gold in a taxable account with a very wide rebalancing band.  At 25% plus-or-minus 15%, you will probably never be forced to sell gold during the accumulation phase, so the tax issue is moot.

3) How committed are you to this employer?  When you change employers you will have an opportunity to roll the 401(k) over to a brokerage where you can buy gold ETFs.  If this is in the near future you could use a different conservative allocation until then.

4) Fidelity's website lists PRPFX as a No-Transaction-Fee fund.  Buy the mutual fund in the 401(k), and convert it to a DIY 4x25 in the future when you roll it over.

I'm not sure which if any of these conform to your ground rules.
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