FOOL'S EYE VIEW
The Simple Way To Play The Stock Market

By Jane Mack (TMFJane)
April 19, 2005

I consider myself to be more than averagely interested in the fine detail of my finances, although I have to admit that I could probably try a bit harder sometimes.

For example, I keep an eye on my mortgage rate and, every couple of years, I ring my lender to see if I can get a better deal. I also overpay my mortgage in order to get shot of it more quickly (I'm about three years ahead of schedule at the moment. Hurrah!).

I shop around each year for my household insurance and I do the same for my car insurance. About once a year, I check to see whether I can get cheaper gas or electricity and, if so, I switch suppliers.

I also have a current account that pays me a fairly decent rate on interest on my credit balance. I save into a cash mini-ISA with a bank that has a good reputation for paying consistently decent rates. And the money that I borrowed eighteen months ago for some home improvements is steadily being paid off. Indeed, every payment that I make goes entirely towards paying off the debt, because I've been switching it from 0% credit card to 0% credit card every time the introductory deal expires.

All of the above takes up enough of my time and consideration to make me feel that I am keeping on top of my finances, but not so much that I am boring myself to death with the tedium of it all!

I save into a shares mini-ISA, too, and into a stakeholder pension, the latter mainly because I'm a higher-rate taxpayer and TMF match my contributions pound for pound, not because I particularly like pensions. And guess where my shares ISA and pension contributions are invested? Yep, index trackers.

Go on - ask me why!

Why don't you pick and choose individual shares yourself?

Lots of reasons - the main one being that I don't understand company accounts. I've tried, honest, but my eyes just glaze over when faced with all those figures.

I'm also not very interested in keeping up to date with the fortunes and failings of individual companies. Year-end reports that say things like 'Operating margins before exceptional items increased from 30.6% to 33.1%, with former RIM businesses advancing from 27.9% to 32.9% and existing businesses from 31.7% to 33.3%', simply don't float my boat. I'd rather read the back of a packet of cornflakes.

And, frankly, I don't have the time - I have a personal life, you know, as well as a full-time job!

In that case, why don't you hand over your money to fund managers to invest for you? They're paid for devoting their time to following company fortunes, plus they understand company accounts.

Because, statistically speaking, in the long run, fund managers do not beat the market as a whole - and they charge too much for this underperformance. Research shows that over the past twenty years, 82% of actively managed funds have failed to beat the benchmark FTSE All-Share Index. Considering that City managers are supposed to enhance the upside and protect you from the downside of investing in shares, it's hardly a good advertisement for their skills if most of them can't beat the benchmark! 

In part, the underperformance is due to initial charges as well as higher annual management charges, but there are other reasons as well. For example, an actively managed fund is subject to things such as changes in fund manager or mergers with other active funds, which may or may not be doing so well. Sometimes, they even change the name of the fund for whatever reason, so you can never truly compare like with like. So, while a particular managed fund might outperform the index over one year or maybe three years or even longer, you can't just plump for one and be certain that it will outperform the index over the long term.

If you can, feel free to find me a twenty-year-old active fund that:

• has no initial charges;
• has an annual management charge of less than 0.5%;
• has the same successful fund manager as it did twenty years ago;
• has not changed its name;
• has not been merged with any other fund; and
• has consistently outperformed the index over that time frame.

Of course, you could always keep yourself informed of the fund managers who are doing particularly well, and follow them from company to company when they move jobs. You could also dump them when they resign because they've suffered from burn-out, but that would entail keeping up to date with the fortunes and failings of individual managers and their funds, wouldn't it?

As I explained above, I don't have the time or inclination to do this.

Well, what about taking advice from an Independent Financial Adviser?

Hah! Think about all those mis-sold pensions, endowments, split-capital investment trusts, high-income precipice bonds, home-income plans and consider which financial experts persuaded us to buy them!

Yes, some IFAs are good and aren't just trying to sell you a juicy commission-based product, but most will still recommend that you invest in actively managed funds - and I've already explained why I don't like those. 

So, we're back to the index tracker. But isn't, say, a FTSE 100 index tracker dominated by a handful of very large companies, thus subjecting investors to the 'eggs in one basket' risk?

The FTSE 100 isn't the only index that you can track. You can follow several different indices and markets, and you can find an example of the choices on offer here. Half of my own shares mini-ISA is invested in the FTSE All-Share, a quarter in a European tracker, and the remaining quarter in the American market. Also, bear in mind that most of the large companies which make up the FTSE 100 operate in foreign markets, so I'm not exactly restricting my investments to UK-reliant firms. I think I'm diversified enough, don't you?

The Motley Fool favours index trackers for the same reasons that I do. The fact is, most of us find financial matters rather dull and often complicated. That's why, for the vast majority, an index-tracking fund is the ideal long-term investing vehicle. They're cheap, simple, flexible and efficient and, best of all, you don't have to spend ages doing any complicated research.

More: Everything you wanted to know about Index Trackers.