Famously, Warren Buffett’s favourite stock holding period is forever. When purchasing shares in a company, he imagines he’s buying the whole business. He’ll only buy something if he’d be happy to hold it if the market shut down for 10 years.
I’ve previously written about how I don’t think there’s much value in today’s market. There are definitely stellar companies in the FTSE 100, but they tend to be trading at a high price.
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This is possibly an unpopular opinion. Many financial commentators are now stating this is a great buying opportunity, with fears around Brexit suppressing valuations.
There are some interesting points about Brexit. Seemingly, no one knows what the resolution will be. With a no-deal Brexit, each company could be affected in different ways. One might suffer from tariffs, while another might struggle to obtain workers. Of course, some companies will possibly benefit, with new trade deals a possibility.
While going through my FTSE 100 list, I pondered Warren Buffett’s question. What stock would I buy if I knew the market would close for 10 years tomorrow? A few came close, with Unilever a very good candidate. But a lot can change in 10 years. Consumer behaviour, management, cost of goods, regulation. That’s without delving into the financials.
I couldn’t be pinned down on one company until I took a step back and realised the only thing I would buy and hold for 10 years would be the FTSE 100 itself.
Using my crystal ball, I hoped in a decade the UK’s exit from the EU would be finalised. In that time period, we might have gone through a recession. There possibly would have been several different changes of governments. But, most importantly, I believed the businesses in the FTSE 100 would have kept trading and strived to increase profits. But unfortunately we can’t predict the future.
Benefits of a FTSE tracker
An index fund is self-cleansing. This means if a company goes bust, or drops out of the index, it’s replaced by another business. Recently, Marks & Spencer departed the FTSE 100 while new entrants have included JD Sports and Aveva. If I had put my money in a FTSE 100 index fund 10 years ago and left it, I would have seen a growth of 47%. That’s without including dividends, which can yield around 4%.
When it comes to index funds, the other thing that appeals to me is the diversification. With a FTSE 100 tracker fund, you can have a well-diversified portfolio for as little as £500.
The main draw for investors is the low-fee structure of an index fund. The commission is usually set below 0.5%, with a platform fee on top. It can be a good fit for the busy investor who plans to buy-and-hold for a long period of time.