Your 401(k) retirement plan is all about investing in your future. That means a few different things as far as choosing the mutual funds in which to invest.
First, you want to consider your time horizon. If you have a long horizon, that means that you have years to weather the market’s ups and downs. Second, you want to set it and forget it — that is, you want funds that produce consistent, long-term returns that aren’t prone to wild swings, especially if you’re closer to retirement. Third, you want a portfolio of diversified funds that perform differently in various market environments to smooth out your overall returns.
Here are three mutual funds that will help you accomplish these objectives.
Fidelity 500 Index Fund (FXAIX)
An index fund is an essential part of a 401(k) portfolio for a few reasons. These types of funds usually have very low expense ratios — that is, the proportion of your assets that you spend on management and administration fees. Lower expense ratios mean more returns for you.
They also track the index they represent. In Fidelity 500 Index Fund’s (NASDAQMUTFUND:FXAI.X) case, that’s the S&P 500. The S&P 500 includes the largest 500 large-cap stocks in the U.S. It’s considered the best barometer for the performance of the market.
The Fidelity 500 Index fund, with $224 billion in assets, has performed pretty much in sync with the S&P 500 over the years. It has a 5-year annualized return of 9.86%, a 10-year return of 13.14%, and a lifetime annualized return of 10.18% as of May 31. It has among the lowest expense ratios out there at 0.015%. This rivals its main competitor, the Vanguard 500 Index fund, which has 0.014%.
Fidelity 500 slightly outperforms Vanguard 500 for both 5- and 10-year returns (by 14 and 15 basis points, respectively). It also outperforms the large blend fund average with 7.58% and 11.42% for the 5- and 10-year returns.
American Balanced Fund (AMBFX)
A balanced fund provides exposure to both stocks and bonds, giving the portfolio more stability, which is particularly desirable during periods when the stock market is down. American Funds’ American Balanced Fund (NASDAQMUTFUND:ABAL.X) is one of the better options in this asset class. It invests between 50% and 75% in equities, depending on market conditions, with the rest in bonds and cash. The current allocation is 51.6% U.S. stocks, 7.5% non-U.S. stocks, 27.4% U.S. bonds, 4.1% non-U.S. bonds, and 9.4% cash.
The fund’s equity holdings are mostly focused on growth-oriented large-cap stocks that pay dividends, while the fixed income holdings are primarily in investment-grade corporate and federal government bonds. It is broadly diversified, with more than 1,800 holdings, the largest of which is Microsoft at 3.9%. The expense ratio is a relatively low at 0.37% — well below the Lipper average for balanced funds of 0.82%. The fund is up about 5.2% year to date, while the S&P 500 is down about 5%. American Balanced is up 10.17% over the past 10 years, beating its benchmark, and 10.68% since its inception in 1975.
T. Rowe Blue Chip Growth Fund (TRBCX)
With the nation facing a recession and what will likely be a long recovery, blue chip stocks are solid bets for investors. These are the stocks of companies that are stalwarts of their industries. They’re stable, profitable, and well-established, with the size and strength to not only survive an economic downturn, but even grow.
T. Rowe Price Blue Chip Growth Fund (NASDAQMUTFUND:TRBC.X) is a top performer in this asset class. This fund, with roughly $75.6 billion in assets, invests in large- and mid-sized blue chip companies. The portfolio is much more focused than the others, with only about 130 holdings. Amazon is the largest at 10.7%. The top 10 holdings account for 49% of the portfolio.
The portfolio management team is led by Larry Puglia, who has managed the fund since 1993. Puglia and his team look for growth companies that lead their industries and consistently meet or beat earnings targets. The performance has been stellar, up 10.74% over the last five years, which beats the S&P 500 benchmark by more than 4%. Over the past 10 years, the T. Rowe Price Blue Chip Growth Fund is up 13.86%, much better than the 10.53% return of the benchmark. For an actively managed fund, it has a surprisingly below-average 0.69% expense ratio.
These three funds can serve as the foundation of a 401(K) plan that consistently grows over the long-term, through various market cycles. But keep in mind, it’s important to further diversify with a range of different funds — from fixed income to aggressive growth — to maximize performance.
