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Fidelity's New "Invest And Forget" Fund


BusinessWeek Investor -- The Barker Portfolio

Fidelity's New "Invest and Forget" Fund

Jeff Slutsky knows the "right" things to do with his portfolio--low costs, diversification, all that. Yet like most executives I meet, Slutsky, CEO of Street Fighter Marketing in Columbus, Ohio, has trouble figuring out when to do those right things. "I have to have a no-brainer because I don't have the time," he says. "I'm building a business, and I've been more focused on accumulating than investing."

In July, Slutsky hit on what he calls a "perfect" solution: He moved most of his assets, which he has in a Fidelity Investments retirement plan for himself and his employees, into its newest offering, the Four-in-One Index Fund. A "fund of funds," it spreads money across domestic and foreign stocKs, plus the U.S. bond market. To Slutsky, it's "the least amount of grief at a reasonable amount of risk."

Good move? This is just the eighth of Fidelity's 283 funds to rely on "passive" indexing, which aims only to match market returns. But for many, especially beginning investors, I think Four-in-One is terrific: It's cheap, simple, and, for retirement accounts, $500 gets you in.

Fidelity didn't invent This kind of fund. Arch-rival Vanguard Group has had one since 1994. But because Fidelity, which prides itself on market-beating stock pickers such as uber-legend Peter Lynch, is the nation's largest manager of 401(k) assets, this is a refreshing acknowledgement that we all don't want to be like Pete. As Joan Bloom, a Fidelity senior V-P, told me, lots of people "either don't have the time or the interest in running a portfolio."

If that sounds like you, here's how Four-in-One works: 55 cents of each dollar goes into an underlying Fidelity fund, Spartan Market Index, which tracks returns of the Standard & Poor's 500-stock index. The next 30 cents is split evenly between two other Fidelity funds, one tracking small- and mid-cap domestic stocks, the other foreign stocks in industrialized countries. The last 15 cents goes into a Fidelity fund following the U.S. bond market. Jennifer Farrelly, a veteran of Fidelity's S&P 500 index clone, runs the fund, checking daily to keep its asset allocation within 1% of these targets.

With no load and low expenses, the fund is close to Vanguard's LifeStrategy Growth. "They're very, very similar funds," says George Sauter, Vanguard's indexing chief. "It's almost splitting hairs saying one is better." Sauter is a good sport, so I'll split the hairs: Vanguard's fund is a touch cheaper and has three siblings of varying stock-bond mixes.

Those details meant little to Slutsky, though. Moving his company's plan to another manager would have been a time-waster. He also might have bought bits of each underlying Fidelity fund. But the beauty of Four-in-One is that as markets move, it's Farrelly, not Slutsky, who will rebalance the fund to keep its allocation on track. "All I have to do is be in this fund and contribute to it every month," Slutsky says.

Regulations keep Fidelity from saying how this fund might have performed historically. But I estimated recent results (since two of the underlying funds are less than two years old, a longer-term test didn't work). They look good, although much of the return comes from an 85% weighting in stocks (table). That may be more risky than you like, especially if you need the money anytime soon.

With this index fund--which amounts to passive investing taken to the fourth power--you'll earn few bragging rights. And as Fidelity's mighty Magellan Fund surges past $100 billion, Four-in-One won't ever find Fidelity's center stage. Yet for long-term investors who value time as well as money, Fidelity's newest fund may be its best.By Robert BarkerReturn to top

TABLE

The Four-in-One Solution

To see how Fidelity's new Four-in-One Index Fund would have fared over the

past year, I looked at the performance of a similarly constructed hypothetical

fund. The exercise shows the Fidelity fund would have outpaced rivals.

FUND 1-YEAR TOTAL RETURN*

HYPOTHETICAL FOUR-IN-ONE INDEX 16.3%

VANGUARD LIFESTRATEGY GROWTH 15.2

AVERAGE ASSET-ALLOCATION FUND 7.2

*12 months ended June 30

DATA: MORNINGSTAR INC., BUSINESS WEEK

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