Investing in a FTSE 100 tracker fund is an easy way to secure portfolio diversification via broad exposure to the UK’s largest shares.
However, some investors prefer to try to beat the market instead. While the risks of buying individual stocks is greater, so are the potential rewards.
Let’s explore the FTSE 100’s return over 10 years and how it compares to an individual stock picking strategy.
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FTSE 100 performance
There are multiple FTSE 100 tracker funds that investors can buy. In reality, the differences between these index funds are negligible bar slight variations in annual fee charges.
One popular, low-cost fund is the Vanguard FTSE 100 UCITS ETF (LSE:VUKE).
Back in July 2014, individual units in this tracker fund were trading for £30.36 each. With just over £5,000 to invest, I could have bought 165 units.
The market price has increased 17% in a decade to £35.56 today. Accordingly, my original investment would have appreciated to £5,867.40, provided I held those units for 10 years.
However, that’s not the whole story. Most of my gains would have come from dividends. Assuming I didn’t reinvest my cash payouts into more units, I could add £2,081.19 to the total, bringing my final sum to £7,948.59.
That’s an overall return of just under 59%.
Investing in individual stocks
That might sound like a reasonable gain, but it’s important to note that this figure is a nominal rather than real return. Accounting for inflation, the true number’s considerably lower.
In addition, there would have been an opportunity cost to leaving £5k in a FTSE 100 tracker fund for the past decade. I could have invested that sum in individual shares instead.
For instance, London Stock Exchange Group (LSE:LSEG) is one FTSE 100 stock that’s significantly outpaced the index in recent years.
Its share price has increased by around 430% over 10 years and the company’s offered a steady stream of dividends on top. That kind of outperformance shouldn’t be sniffed at.
Although past performance doesn’t guarantee future returns, I happen to think that London Stock Exchange Group is well-placed to be one of the leading FTSE 100 shares over the coming years. In my view, it’s a stock well worth considering.
A strategic partnership with Microsoft to build bespoke generative artificial intelligence (AI) models could be a lucrative source of growth. After all, the company owns an abundance of valuable data. Leveraging AI effectively should allow the business to enhance its customer offering considerably.
Granted, a lack of fresh UK IPOs could weigh on the firm’s performance. Plus, a forward price-to-earnings (P/E) ratio above 26 means the shares are more expensive than the FTSE 100 average.
Nonetheless, I believe the risk/reward profile looks attractive on balance.
The bottom line
While some stocks like London Stock Exchange Group have been top performers, other companies have trailed the FTSE 100 index. For example, Vodafone shares have lost nearly 63% of their value in the past decade.
More cautious investors who are concerned by volatility may wish to stick to tracker funds and that’s perfectly fine. But, there’s a nice middle ground too. Investors can consider buying both tracker funds and individual shares, which is exactly what I choose to do.
