In my years of guiding clients through market cycles, I’ve learned that the most successful investors are not those who predict downturns, but those who prepare for them. When Fidelity clients express concern about a bear market, they often ask for a specific fund name—a single ticker symbol that will serve as an impenetrable shield. My response is always the same: effective defence is not a product; it’s a strategy built within your portfolio.
Fidelity, as a platform, offers one of the most comprehensive arsenals available to the self-directed investor. The power lies not in any one “bear market fund,” but in knowing how to combine Fidelity’s extensive offerings—from their proprietary mutual funds to their low-cost ETFs—to construct a resilient portfolio. In this guide, I will walk you through the exact defensive strategy I would implement on the Fidelity platform, using the tools they provide.
Table of Contents
Reframing the Goal: Relative Outperformance
First, we must align on our objective. The goal of a defensive strategy is not to generate spectacular positive returns during a market crash. That is a fantasy. The realistic and powerful goal is to lose less than the broader market. This concept of relative outperformance is what creates long-term wealth. A portfolio that drops 15% when the S&P 500 drops 30% has not just preserved capital; it has gained a significant 15% advantage that forms a higher base for the eventual recovery.
Fidelity’s platform is ideal for this because it allows us to build a multi-asset, strategically balanced portfolio without transaction fees for many of its own funds and a vast array of iShares ETFs.
The Defensive Pillars: A Fidelity-Specific Toolkit
We will build our defence using three pillars, each populated with best-in-class Fidelity options.
Pillar 1: Capital Preservation & Stable Income
These are the bedrock holdings. Their job is to remain stable and provide liquidity.
- Fidelity Government Money Market Fund (SPAXX): This is often the core position in Fidelity brokerage accounts. It holds U.S. government securities and is a secure place to park cash. While yields are low, its stability is paramount during volatility.
- Fidelity Short-Term Treasury Bond Index Fund (FUMBX): This ultra-low-cost fund (0.03% expense ratio) tracks the Bloomberg 1-5 Year U.S. Treasury Index. It offers a slight yield premium over a money market fund with minimal interest rate and credit risk. It’s a perfect “next step” out on the risk spectrum for defensive cash.
Pillar 2: High-Quality Fixed Income (The Negative Correlation Engine)
This is the most potent tool for balancing equity risk. When stocks fall, high-quality bonds often rise.
- Fidelity Long-Term Treasury Bond Index Fund (FNBGX) (Expense Ratio: 0.03%): This is a cornerstone of any defensive strategy. It tracks the Bloomberg Long U.S. Treasury Index. Long-duration Treasuries are historically the most reliable hedge against equity sell-offs due to their high sensitivity to interest rates and their “flight-to-safety” status.
- Fidelity U.S. Bond Index Fund (FXNAX) (Expense Ratio: 0.025%): For more general, core bond exposure, this fund tracks the Bloomberg U.S. Aggregate Bond Index. It provides diversification across government, corporate, and mortgage-backed securities. While it won’t rally as strongly as long-term Treasuries in a panic, it offers stability and income.
Pillar 3: Defensive Equity Strategies
These allow us to stay invested for long-term growth but with a conscious tilt towards stability.
- Fidelity Low Volatility Factor ETF (FDLO) (Expense Ratio: 0.29%): This ETF invests in U.S. large-cap stocks with lower volatility than the broader market. It systematically tilts away from the most volatile sectors, helping to smooth returns.
- Fidelity Large Cap Value Index Fund (FLCOX) (Expense Ratio: 0.035%): Value stocks, particularly large, established companies, are often more resilient in downturns than high-flying growth stocks. They frequently trade at lower valuations and may pay dividends, providing a return stream even in falling markets.
- iShares MSCI USA Min Vol Factor ETF (USMV): While a BlackRock iShares product, this ETF is available commission-free on Fidelity’s platform and is a gold standard in the low-volatility space. It’s a excellent tool for this specific goal.
Constructing a Sample Defensive Portfolio on Fidelity
Let’s assume a hypothetical investor, “David,” who is risk-averse and wants to fortify his Fidelity IRA against a potential downturn. His current portfolio is 100% in equities. We design a new, defensive allocation.
| Defensive Pillar | Fidelity Fund / ETF Ticker | Allocation | Strategic Purpose |
|---|---|---|---|
| Capital Preservation | FUMBX (Short-Term Treasury Index) | 15% | Stability, low volatility, liquidity. |
| Core Fixed Income | FXNAX (U.S. Bond Index Fund) | 25% | Broad bond market exposure for income and diversification. |
| Hedge Position | FNBGX (Long-Term Treasury Index) | 15% | Key Hedging Tool. Designed to appreciate during a equity bear market. |
| Defensive Equity | FDLO (Low Volatility ETF) | 30% | U.S. equity exposure with a built-in stability tilt. |
| International Diversification | FSGGX (Global ex-US Index Fund) | 15% | Diversification away from U.S.-only risk. |
| 100% |
Table: A Sample Defensive Portfolio Built with Fidelity Funds
Why This Works: In a bear market scenario where the S&P 500 drops 30%, we might expect:
- FUMBX holds steady or gains slightly.
- FXNAX may see a modest gain (e.g., +5%) as investors flee to quality.
- FNBGX, our hedge, could see a significant rally (e.g., +10-15%).
- FDLO would decline, but ideally significantly less than the S&P 500 (e.g., -20%).
- FSGGX would provide diversification, though international markets may also fall.
The overall portfolio decline would be dramatically less severe than a 100% equity portfolio. This relative preservation of capital is the entire objective.
The Fidelity Advantage: Tools and Discipline
Beyond funds, Fidelity offers tools to maintain discipline:
- Automatic Investments: You can set up automatic transfers into your defensive bond funds from your bank account. This ensures you are consistently building your defences, a strategy known as dollar-cost averaging.
- Rebalancing: The platform allows you to easily see your current allocation versus your target. Periodically (e.g., annually), you can sell assets that have appreciated above their target (like bonds after a rally) and buy those that are below (like equities after a fall). This forces a disciplined “buy low, sell high” approach.
The Final Word: Strategy Over Speculation
As a Fidelity investor, you are equipped with everything you need to build a robust defence against a bear market. The key is to act before the storm hits. The funds I’ve outlined—FUMBX, FXNAX, FNBGX, and FDLO—are not speculative bets. They are strategic, low-cost building blocks available to every Fidelity customer.
Your greatest advantage is not a secret fund; it is the discipline to allocate to these defensive assets today, when the sun is shining, and the fortitude to hold them through the storm, trusting that their negative correlation to equities will serve its historical purpose. This is how you transform your portfolio from a passive victim of market cycles into a resilient, strategically managed engine for long-term wealth creation.
