Investing the Vanguard way at Fidelity

Q: In a recent column about hiring a financial planner, you suggested Admiral shares of Vanguard's Balanced Index Fund. We are currently with Fidelity Investments. Does Fidelity have a fund comparable to Vanguard's Balanced Index Fund? - P.H., Houston

A: Fidelity, like most mutual fund companies, is mostly a managed-fund shop. The firm believes in active management and has been a leader in the introduction of low-cost, no-commission, actively managed mutual funds. So you won't find a Fidelity index fund that duplicates Vanguard Balanced Index. You won't find any Vanguard funds on Fidelity's NTF (No Transaction Fee) list, either.

You can find Vanguard Balanced Index Investor shares on Fidelity's list of funds you can buy with a transaction fee of $49.95 on purchase, but no fee on redemption. Also, you can't buy the Admiral shares. The Investor shares have a minimum investment of $2,500 and an expense ratio of 0.25 percent. The Admiral shares have a minimum investment of $10,000 and an expense ratio of 0.09 percent.

Those differences make buying many Vanguard funds at Fidelity quite expensive. On a $100,000 investment, for instance, the expense ratio cost difference between Investor shares and Admiral shares would be $160 a year, every year.

Those costs are still low relative to the traditional gougers in the business - the folks who think it's a good idea to charge you 2 or 3 percent a year - but there are some alternatives you might consider if you are willing to do a tiny bit of work.

Fidelity offers 70 iShares exchange-traded funds (ETFs) with no commission costs. You can build a virtual duplicate of Vanguard Balanced Index Fund by buying two ETFs:

• iShares Core S&P Total U.S. Stock Market (ticker: ITOT, expense ratio 0.07 percent); and

• iShares Core U.S. Aggregate Bond (ticker AGG, expense ratio 0.08 percent).

Note that the combined expense ratio will be slightly lower than the cost for Vanguard Balanced Index Admiral shares.

If you take the Couch Potato portfolio route and buy the ETFs in equal dollar amounts, you'll have a 50/50 portfolio that will be simple to rebalance. To duplicate the traditional asset allocation of Vanguard Balanced Index, you'll need to get a bit more complicated and put 60 percent in the equity index and 40 percent in the fixed-income index.

If you want to avoid the extra work and "let Fido do it," you could also invest in Fidelity Puritan Fund, one of the few managed funds that I mention regularly. It's a managed balanced fund with a splendid long-term track record and reasonable (but not dirt-cheap) expenses. Over the last 15 years, FPURX has been in the top 12 percent of balanced funds with an annualized return of 6.72 percent. Over the same period, Vanguard Balanced Index was in the top 29 percent, earning an annualized return of 5.40 percent.

Q: Is it true that Ronald Reagan increased the Social Security taxes but never put the money into the Social Security Trust Fund, and then George W. Bush took trillions to fund his wars? If this hadn't happened, wouldn't the Social Security Trust Fund be in much better shape? How can politicians take our retirement funds without being prosecuted? Is it just legalized theft? - K.M., by email

A. No, it isn't true. And Lyndon Johnson didn't steal from the trust fund either, as some believe. You can read a history of the fund and how its accounting has changed over the decades at this link: ssa.gov/history/BudgetTreatment.html.

Read it carefully - it isn't long - and you'll understand the basic accounting for the Social Security Trust Fund.

Until the 1983 reforms, employment tax collections didn't exceed benefit costs by very much. That changed after the reforms, which allowed the trust fund to build up to $2.7 trillion on the billions of dollars workers paid in excess of benefits paid out.

The excess was deposited to the Social Security Trust Fund as special Treasury securities. But the actual cash went into the government's general fund and was spent by presidents and Congresses of both parties. Including the Social Security surplus in the "unified budget" allowed both parties to hide vast overspending. Now the trust fund has a collection of IOUs that represent claims on the U.S. government. Those claims, in turn, can be met by new taxes citizens will be called upon to pay in the future.

• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser.

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