Why should I invest in stocks and shares?
Investing in stocks and shares has been historically proven to build wealth and help people become rich. Many people mistakenly believe that they can grow rich by saving prudently and cutting back on their expenses.
Whilst reducing expenses and keeping lifestyle creep in check does indeed help, there are only so many costs to be cut and doing so can lead to a very basic and simple life when taken to the extreme.
However, cost-cutting is limited, whereas the upside in investing is not limited at all. There is no maximum amount that can be made in stocks, and with compounding, this only serves to amplify our wealth.
Therefore, cash is not a very attractive option for savers. The interest rate is currently below the rate of inflation, which means cash is slowly eroding year on year and becoming less valuable.
Savers are punished for keeping their hard-earned cash in a bank account, and the only other options are to either spend it or invest it. As spending cash doesn’t build wealth, the only real option is investing.
By investing, one is able to take advantage of the value created by some of the world’s best companies and beat the rate of inflation.
What is the FTSE 100?
The FTSE stands for the Financial Times Stock Exchange and is a share index of stocks in the UK. The FTSE 100 consists of the 100 largest stocks in terms of market capitalisation on the London Stock Exchange (LSE).
The market capitalisation is the total value of a company that is traded on the stock market, which is calculated by multiplying the total number of shares in issue by the current share price.
Many well-known companies are listed here, and the FTSE 100 consists of banks (Barclays, HSBC, Lloyds, Royal Bank of Scotland), housebuilders (Persimmon, Taylor Wimpey, Barratt Developments), pharmaceuticals (AstraZeneca, GlaxoSmithKline), telecommunications (Vodafone, BT), and even retailers (JD Sports, Kingfisher, Next).
Why should I buy a FTSE 100 tracker?
The FTSE 100 is an index that consists of ‘blue chips’ (the blue poker chip is the highest value chip on the table) that are mature companies and industry stalwarts. These companies are safe, stable, profitable, and often pay dividends to their shareholders.
Buying a FTSE 100 tracker is not going to make anyone rich overnight, but these stocks are well diversified and owned by institutions and pension funds. It is pedestrian growth but considered low risk.
By owning 100 companies, the impact of any stock going bust overnight is severely reduced. The FTSE 100 index also has a quarterly shuffle – where the three lowest value stocks are demoted into the FTSE 250, and the highest value stocks in the FTSE 250 are moved into the FTSE 100. This is exactly the same as relegation from the Premiership and promotion from the Championship in football.
How much can I make buying a FTSE 100 tracker?
A study done by AXA Self Investor found that investment over a 10-year period in the FTSE 100 had a 95% chance of success. The average return was 70% gain (assuming dividends were reinvested).
The study covered two decades from February 1996, and included two of the worst stock market crashes in history: Dotcom and the 2008 Financial Crisis.
The Dotcom bubble was a period when US technology companies rapidly rose due to the internet. Companies that did not make any profit or even revenue were valued at sky-high valuations on the assumption that the internet would make these companies rich. After excessive speculation, eventually, the bubble burst, leading to one of the biggest stock market recessions in living memory.
The 2008 Financial Crisis was caused by the subprime mortgage market in the US, which spread into an international banking crisis with the collapse of Lehmam Brothers. It was considered the worst crisis since the Great Depression (Wall Street Crash of 1929).
The largest 10-year return in the FTSE 100 was 154%, and the lowest return was a loss of 14.5%. This was the period from February 1999 (just before the Dotcom bubble burst) and February 2009 (when the world was deep in recession from the 2008 Financial Crisis). However, out of all possible 120 periods – only six of them were losing periods.
None of these periods included additional deposits, such as dollar-cost averaging (DCA). This is an investment strategy that continues to buy the same monetary value on a regular basis in order to gain increased exposure and reduce the impact of volatility on the total purchase. It also means that when prices are weak the investor is able to buy more units for the same amount of money.
Another strategy that can be used that wasn’t included in the study is a contrarian strategy. This is when an investor sees that prices are weak and decides to take advantage by purchasing more units than usual in order to bring the average cost down even further.
Though there is no guarantee of an index returning to a previous high, contrarians have often been handsomely rewarded for buying weakness in indexes.
There are several FTSE 100 trackers – which one should I buy?
When choosing a tracker fund, one should be aware of the fees. Tracker funds are passive and therefore low cost, so the fees should be minimal.
The iShares Core FTSE 100 UCITS ETF (ISF) comes recommended from the Investors Chronicle, due to its low 0.07% ongoing charge. This tracker fund also returns slightly more than its rival Vanguard product due to lending out its shareholdings out to short-sellers for a fee.
Buying this fund will give a private investor access and exposure to all of the FTSE 100 companies simply by buying this tracker.
There are certainly other suitable trackers and not just this one – but always check the fees. Some funds have entry and exit fees as well as management fees, alongside the ongoing charge.
How do I buy a FTSE 100 tracker?
To buy a FTSE 100 tracker and take advantage of the wealth the stock market builds you will need to open a share dealing account. By doing this in an Individual Savings Account (ISA) this will mean all profits made in this account are completely exempt from tax.
The Stocks & Shares ISA is a tax-free wrapper that permits a certain amount of money to be deposited every year, and so this allowance should be used in order to maximise gains that can be shielded from tax.
Two of the largest stockbrokers in the UK are IG Index and Hargreaves Lansdown (I use both). They are both listed on the London Stock Exchange and so offer more transparency over company accounts than their private competitors.
Should I buy a FTSE 250 tracker?
The FTSE 250 is a stock market index that consists of the next 250 biggest stocks in terms of market capitalisation on the London Stock Exchange after the FTSE 100. When a stock is demoted from the FTSE 100 it ends up in the FTSE 250, and vice versa.
The FTSE 250 is also a more domestic index than the FTSE 250.
Whilst there are many companies that operate globally and are multi-national corporations (such as Aston Martin, Britvic, Dominoes, PZ Cussons), there are plenty of companies that operate solely in the UK with little to no international exposure.
Some examples of FTSE 250 companies are retailers (Dunelm, Dixons Carphone, WH Smith, B&M, Marks & Spencer), leisure businesses (Cineworld, Dominoes, Greggs, 888, Wetherspoon), food and beverage businesses (Britvic, Tate & Lyle, Barr), and many more.
The FTSE 250 has generally performed better than the FTSE 100 due to the amount of businesses that are smaller and therefore are able to grow quicker. However, these smaller businesses are often less established than the FTSE 100.
The iShares FTSE 250 UCITS ETF has an ongoing charge of 0.4% and also benefits from lending out securities. However, this time it is its competitor product by Vanguard that is recommend by Investors Chronicle.
The Vanguard FTSE 250 UCITS ETF (VMID) has an ongoing charge of 0.1% which is the cheapest. Again, always look at the charges before buying an ETF or index tracker fund.
Should I invest outside of the UK?
Investing in the UK economy is a good idea for people who reside in the UK, but it is not the only place in the world to find quality shares and take advantage of the stock market’s wealth-building power.
The US has produced some of the best companies on the planet, and the S&P 500 (Standard & Poor) has many of these companies in the index.
The FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) are all listed here, alongside some of the world’s most iconic brands (American Express, The Coca-Cola Company, Walt Disney, Walmart, McDonald’s).
How do I buy an S&P tracker fund?
Buying an S&P tracker fund is no different to buying a FTSE 100 or FTSE 250 tracker fund. Opening a share dealing account that is a Stocks & Shares ISA ensures that all profits are free from tax.
For the 2019 selection of Exchange Traded Funds (ETFs), Investors Chronicle recommends the iShares Core S&P 500 UCITS ETF (CSP1). This is the cheapest tracker at 0.07% and is the largest, most liquid, and also the best tracking ETF which follows the S&P 500 index.
What is an ETF?
An ETF is an Exchange Traded Fund. This is an investment fund that is traded on the stock exchange (much like a stock).
They will typically hold assets such as shares and commodities, or bonds, and are available for us to purchase as we would a stock. Many ETFs track an index and they are available for indexes and also sector trackers.
Passively managed funds and index investing
One of the great advantages of indexing is that when we buy a FTSE 100 or even a FTSE 350 tracker fund, we buy into a fund that owns all of the companies in that index (all 100 companies in the FTSE 100 and all 350 companies in the FTSE 350!).
This means that to lose all of our money, all of the companies in the index would be required to go bust at exactly the same time.
Other countries have their own index, and plenty of ETFs exist (exchange traded funds) that offer exposure to certain sectors, global exposure, or commodity exposure. They will offer a basket of securities in order to diversify the fund and achieve their stated goal.
For example, a global income fund may have stocks that have strong and predictable cash flows from large companies across the world, and it may even include housing exposure in order to benefit from the rental income.
This ETF would prioritise income rather than capital appreciation. Debt may also be included as that offers a steady yield.
An oil-based ETF would include securities that are in or focussed around the oil sector. There are many to choose from and an ETF or tracker to suit everyone’s investment profile and risk.
It is worth noting that I am not a financial advisor and I am not regulated by the Financial Conduct Authority. I am not legally allowed to give advice and this post is for educational purposes only. It is not (nor should it be intended as such) investment research.
I trade and invest my own capital for a living and this website constitutes of my experience and opinions. Everyone has different risk appetites, investment horizons, and portfolio sizes, so what is best for me may not be best for you.
I also believe in full transparency and so there are affiliate links included in this article. I may receive a commission payment if an account is opened and certain conditions met. If you found the information here useful but would rather that I didn’t receive any commission, then simply Google the names of the brokers and open an account.