COMMENT
Cheap, Simple Investing In 2006!

By Cliff D'Arcy
December 22, 2005

Regular Fool readers will know that, when it comes investing in shares, I'm something of an evangelist.

Perhaps the main reason why I'm so attracted to stock-market investment is that, over long periods, shares generate higher returns than do mainstream investments (including property, bonds and cash). In fact, over the last century, the UK stock market has produced an average return of 11% a year, with income reinvested.

For the record, 11% a year can make you seriously well off: investing £250 a month over, say, thirty years, growing at 11% a year will create a pot worth over £700,000. Of course, inflation -- the tendency of prices to rise over time -- will mean that this won't go as £700,000 does today, but every little helps!

Another reason why I love investing in shares is the joy of earning compound returns, which you can think of as being interest on interest on interest, and so on. Reinvesting my dividends (the income from shares) in more shares helps my portfolio to grow much faster -- and it prevents me from spending this money, probably on something that I don't really need.

Alas, stock-market investing is far from being plain sailing. Indeed, between the start of 2000 and March 2003, the UK experienced a painful bear market, during which time share prices fell long and hard. Indeed, the blue-chip FTSE 100 index, which measures the value of the UK's one hundred largest listed companies, took a three-year dive. Having peaked at 6,930 on the last day of 1999, the "Footsie" fell to a low of 3,287 on 12 March 2003, down a whopping 53%. Ouch!

Still, as a consequence, the last three years have seen the FTSE 100 produce pretty decent returns. Excluding dividends, the Footsie rose by 13.6% in 2003, 7.5% in 2004 and, so far, is up 16.2% in 2005. Not bad, eh? Taking an even wider view, the FTSE All-Share, which measures the value of around 700 firms, has done even better over the same period. This is partly because the share prices of medium-sized and small companies have outpaced those of the big boys, which could mean that the FTSE 100 is due a comeback next year.

Some financial pundits claim that stock-market investors should brace themselves for a disappointing time in 2006, thanks to slowing economic growth, rising unemployment and restrained consumer spending. However, I don't agree, because the FTSE 100 in particular looks cheap by historical standards. One market valuation, the price/earnings ratio, is under fourteen for the FTSE 100, which is well below its historic average. Also, the FTSE 100's yield (the return from dividends) is just above 3%, which is pretty good, too.

Hence, I fully intend to keep ploughing my spare cash into shares for the foreseeable future. One cheap, easy way that I do this is by investing in a passively managed fund known as an index tracker. This mechanically tracks a particular index up and down and, because you're not paying for the expensive services of a Ferrari-driving fund manager, its costs are very low. Indeed, you should expect to pay around ½% a year or less for a decent index tracker, compared to 1½% a year for an actively managed fund, which usually has an upfront charge of 5% on top, as well!

Alternatively, to keep costs to an absolute minimum, you could invest in index-tracking shares known as Exchange Traded Funds (ETFs). In the UK, ETFs are issued by iShares; I invest directly in the FTSE 100 by buying iFTSE 100 shares, which I wrote about here.

There you have it: two routes to dirt-cheap investing. So, what are you waiting for? Start investing today!

More: You can invest in the UK's biggest and most popular index tracker via the Fool!

Cliff invests in index trackers and owns iFTSE 100 shares.