Insider Jeff Fleming

Asset Allocation: Planning Your Future Income

Dear Jeff:
I plan to retire in four or five years. Having some money in Fidelity's Contra, Select Computer, and the Magellan Fund, should I be pulling the money out now and putting it into some other type of saving plan that would be safer? And what would you suggest I put it into? Thanks in advance.

Jeff Says:
The trend in the financial services industry with regard to retirement planning is to maintain a diversified portfolio throughout retirement, rather than gradually liquidating your stocks or stock funds as you approach retirement age.

Speculating on the reasons why, it's no secret that baby boomers have failed to plan or to save enough for their retirement. Insufficient capital at retirement must, therefore, be invested in assets providing a greater return, at least historically, in order to allow boomer retirees to maintain boomer living standards.

Just the interest from their investments will not provide sufficient income to accomplish this. Additionally, asset allocation strategies are becoming more familiar to investors and raising their investment confidence. Consequently, you shouldn't automatically pull ALL of your money out of your mutual funds just because you are near retirement.

With the amount of information in your question, I cannot sufficiently answer you. I can, however, provide you with some information about your funds. First, both Fidelity Contrafund and Fidelity Magellan invest in large companies and have an average annual return over the last 10 years of more than 20 percent.

Both have outperformed the S&P 500 during that period of time as well, so congratulations on your returns. The problem with these two funds in your portfolio is that you lack diversification. At the time of my research, a large percentage of each fund's holdings was the same. So, although you own two different funds, you haven't actually diversified.

Fidelity Select Computer fund also outperformed the S&P 500 based on its 10-year average annual return of over 24 percent. Again, in terms of performance, you did very well. If there is a criticism or concern with owning a "sector" fund such as this, it's that sector funds also lack diversification. In your case, as long as the technology sector does well, this fund should do very well. But, when technology stocks drop, this fund's volatility will certainly reflect it. The trick is to anticipate which sectors will be profitable and to invest in a fund whose objective as stated in its prospectus is to invest in that sector.

In summary, it may be appropriate to liquidate a portion of your funds to further diversify your portfolio. For more information on structuring a portfolio, please refer to this week's first question, my previous articles regarding asset allocation, the ThirdAge Asset Allocator tool, and our Pointers for a Positively Perfect Portfolio. I hope this paints a clearer picture for you.