Index Tracker?

mattih5

Hi,

I'm planning on making monthly contributions to an index tracker, primarily because I have read that it is a good way of gaining exposure to the stock market at a reasonably low risk; if their is such a thing.

I plan on this being a long term investment. However, with the recent valatility of the market (FTSE 100) i'm wondering whether this is a good time to start one or even if their is ever going to be a good time.

Another thought is how do I know which is the best tracker to invest with?

What are your recommendations; a tracker for FTSE 100, All-Share, foreign markets - their seems to be so much choice and no information on the best to go with.

Thanks in advance for your replies,

ReportInvestor

dunstonh will tell you that the FTSE100 is more risky than many other funds [that an IFA could recommend to you] because it is so heavily weighted to the top few companies and also to certain sectors eg banks, oils. But the FTSE100 also has significant foreign earnings these days (which could be an advantage in spreading risk).

I wouldn't worry about volatility if you are planning regular monthly investments over a long period of time. This is my own investment strategy and it means you can actually benefit from some types of volatility e.g. if the market fell sharply over the next six months but subsequently recovered. It's call "pound cost averaging" and basically your money buys you more shares when the market falls.

If you are wanting to spread risk you could look at the FTSE250 (the next batch of companies after the top 100) and an overseas tracker.

Through ETFs (Exchange Traded Funds) you can currently track most overseas markets.

Re charges, I think Fidelity are about the lowest at 0.3% - and this is definitely an advantage of using a tracker compared to 1.5% in most managed funds.

dunstonh

I'm planning on making monthly contributions to an index tracker, primarily because I have read that it is a good way of gaining exposure to the stock market at a reasonably low risk; if their is such a thing.

Its not low risk. FTSE tracker funds would be around risk 6-8 on a 1-10 risk scale. Stockmarket investments start at 5.

Most novices investing into the FTSE100 havent got a clue about the risk and have ended up disapointed. Its been the worst performing UK sector for about 8 years now.

dunstonh will tell you that the .....

I will tell you that single sector investing is old fashioned and leads to poor returns and/or underperformance over the medium to the long term. Single sector investing is where most of the failings have been in poor quality investments in the past and you just have to read any report on investing to see that sector allocation with rebalancing is the best approach. Its not some magic dunstonh approach. Any professional investor, adviser or researcher knows it.

If you are wanting to spread risk you could look at the FTSE250

...by increasing it.

Dont let charges dictate where you invest. Risk should be first consideration, then sector allocation then funds and charges.

Looking at a FTSE tracker single fund investment, if you had built up a fund of £10k in 2001, that would have been valued down to £6k after the crash. How would you react to that?

ReportInvestor

Which is why recent developments are so encouraging in that you can now build up a mini-portfolio of different trackers linked to different world stock markets .

mattih5

Thanks for the replies.
With regards to the example of the crash, the value of this would have now returned to normal though wouldn't it as the FTSE 100 has near enough recovered. As I understand, this is the benefit of investing over time and riding out troughs like this....although it has been a long wait.

So to reduce my risk it is suggested the FTSE 250 would be better than the FTSE 100.

Is it wise of me though to invest in an index tracker as the markets seem to have risen quite substantially over the last 3 years; is the market capable of sustaining growth or could it have reached a peak now?

Where can I find out who to invest with and who is best? Do I have to stump up a lump sum or can i start with monthly contributions?

Thanks.

Jake'sGran

I think trackers are boring. Apparently, the cheapest is the one run by Fidelity, according to something I read in The Times Money today, at .3%. You can read about for yourself online at their website. The tracker I used to have (Virgin) returned only the money I had put in even after a few years and has since been better invested elsewhere. It would have been better in a high interest bond or other savings account. Report Investor has the same opinion as I. It is being forecast that the market might reach 6300 by Xmas.
Invest in some good shares with good yields or a equity income fund.

jem16

mattih5 wrote:

Thanks for the replies.
With regards to the example of the crash, the value of this would have now returned to normal though wouldn't it as the FTSE 100 has near enough recovered. As I understand, this is the benefit of investing over time and riding out troughs like this....although it has been a long wait.

Would you not have expected your investment to grow rather than just recover?

So to reduce my risk it is suggested the FTSE 250 would be better than the FTSE 100.

Dunstonh seemed to suggest that this would increase your risk rather than reduce it, if I read his comments correctly.

dunstonh

With regards to the example of the crash, the value of this would have now returned to normal though wouldn't it as the FTSE 100 has near enough recovered. As I understand, this is the benefit of investing over time and riding out troughs like this....although it has been a long wait.

The FTSE100 would be about breakeven due to income (FTSE100 has yet to recover to previous high point). However, a sector allocated portfolio would have grown by 75-150% depending on risk.

The old proverb, never put your eggs in one basket is very true with investments.

So to reduce my risk it is suggested the FTSE 250 would be better than the FTSE 100.

The FTSE250 funds have performed better than the FTSE100 and the expectation is that it will continue to outpace the 100 but there are no guarantees. The 250 funds are higher risk than the 100 funds.

Is it wise of me though to invest in an index tracker as the markets seem to have risen quite substantially over the last 3 years; is the market capable of sustaining growth or could it have reached a peak now?

Nobody knows. Which is why you do spread it around because different areas perform at different rates at different times. One sector could see no growth (such as the FTSE100 has done over 6 years) whilst another could double in two-three years (as other sectors have done).

Historically, the UK has been the top performing sector once every 5-7 years. So, if you invest for 20 years you will get lucky 3 maybe 4 times in that period with best performance.

There is little point worrying about 0.5% a year difference in charges when the growth potential difference is 5-20% a year. Who is going to be happier; the person who invested £5000 in the FTSE 100 who now has £5120 five years on but paid lower charges or the person that invested £5,000 and now has £10,123 but paid a little more? (real figures using the same risk profile).

There is nothing wrong with trackers. Use them as part of your portfolio. Just dont stick all your money in one spot.

ReportInvestor

I didn't quite phrase my first comment right.

The 250 is seen as a more risky investment (smaller companies, higher P/E ratios, lower yields), but a different type to the FTSE100 & therefore it would be diversifying if you invested in them both.

For instance dh is right to suggest FTSE100 trackers have done poorly in the crash and its aftermath. But by comparison a FTSE250 tracker is up 67% over 7 years since 1999.

EdInvestor

Jake'sGran wrote:

I think trackers are boring.

:T I completely agree. They are cheap (and nasty).

With regards to the example of the crash, the value of this would have now returned to normal though wouldn't it as the FTSE 100 has near enough recovered

Still a way off its peak which was in December 1999, how long do you wanna wait? :rolleyes:

Invest in some good shares with good yields or a equity income fund.

Absolutely - that's a much better idea.

Mr_Mumble

Could anyone be kind enough to tell me why Fidelity's MoneyBuilder UK Index (the well advertised 0.3% TER tracker) has such a low yield? According to trustnet it yields 2.25% while others (M&G, L&G and F&C) yield 2.60-2.90% for an all-share tracker.