Insider Jeff Fleming

Outgrowing a Fund

The same mutual fund that served you well in saving for retirement may not be your best investment in retirement. Plus, Jeff talks about the importance of having adequate life insurance.

Dear Jeff:
My income is less than $15,000 a year. My savings are in FDFFX. I have been happy with this investment so far, but would like to know if you think I should change to a safer investment. I am 65, and debt free.

Jeff Says:
I realize that it is dangerous to assume, but I am going to assume that your savings are invested in the Fidelity Retirement Growth Fund, which has a ticker symbol of FDFFX. Before I talk about your fund, however, I want to congratulate you for being debt free, a financial condition rarely seen today. You are living proof that anyone, regardless of income, can accomplish this goal.

Prior to January 29, 1991, the Fidelity Retirement Growth Fund was formerly known as the Fidelity Freedom Fund. This fund, as stated in its prospectus, seeks capital appreciation by investing primarily in common stocks of both domestic and foreign companies. The size of the company is not really a factor for Fidelity in its selection of stocks; the fund was primarily designed for tax-advantaged accounts, such as IRAs or other retirement plans, that have longer holding periods. Investing in such plans minimizes the effects of stock market fluctuations. This anticipated long-term holding period also means that the fund does not generally consider the length of holding when trading securities in its portfolio. Nevertheless, it happens that this fund invests primarily in large companies.

FDFFX's average annual total return over the last ten-year period is a little more than 17 percent. This is a very good average, although it is less than the ten-year average of the Standard & Poor's 500 stock index. But, how much risk are you exposed to with this fund? The answer to this question will determine whether or not you should move to a safer investment.

The fund's standard deviation is the most appropriate tool for measuring risk when an investor only has one fund, so it will be our measuring stick. Standard deviation is used to try to predict the range of returns that are most likely for a given fund. A higher standard deviation means a wider predicted range of performance. This, in turn, implies that the fund has greater volatility than one with a lower standard deviation.

Fidelity Retirement Growth Fund has a ten-year standard deviation of 17.83 (data as of 12/31/98). Without getting into a detailed technical explanation of the formula, this essentially means that this fund has what I would consider to be above-average risk for a fund of this type. Therefore, if you are concerned about risk (and you should be if this is your only fund), you should consider repositioning at least a portion of your holdings from this fund into one or more others.

Find out your ideal mix of investments depending on your stage of life with theThirdAge Asset Allocator, or consider these factors to help you decide when it's time to sell a fund.