Sometimes after the long Christmas holidays, doing a lot of research into buying individual shares might sound tiring (though, for some people, a new year brings new opportunities). In any case, if I had decided not to buy individual shares this year and simply put a spare £1,000 into the FTSE 100 index back in January, here is what would have happened.
How investing in an index works in practice
By the way, when I talk about putting money into an index, I do not mean buying all of the shares in that index myself.
Rather, I would simply have bought into an index tracker fund. Whereas a lot of investment funds pay managers to decide what shares to buy, a tracker fund does what it says on the tin.
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By buying shares in such a tracker, I would be investing in a portfolio that is meant to represent as closely as possible a specific index (in this case, the FTSE 100).
There are lots of different such funds available, some with what I see as very competitive pricing structures.
Good year for blue-chips
So far this year, the FTSE 100 has performed well. The index is up 7.3% since the start January, so my £1,000 investment would now be worth roughly £1,073.
By the way, as I mentioned above, a tracker fund aims to replicate the index as closely as possible. But as prices of individual shares change constantly, that is a moving target – and the fund share price itself can move.
So for example, the snappily named tracker Vanguard FTSE 100 UCITS ETF is actually up 7.8% (not 7.3%) so far this year. That can work both ways. Even sophisticated trackers sometimes do slightly better than the index but sometimes slightly worse.
As well as capital gains, I would be earning passive income from my holding. The dividend yield on the FTSE 100 at the moment is 3.6%. So I would be on course for around £36 in dividends by the end of the year, give or take (I say give or take as there can be a lag between buying a share and receiving any dividends from it).
Why didn’t I do this?
So parking £1,000 in the FTSE 100 at the start of the year would have worked out well for me. But I chose instead to invest in individual shares from the blue-chip index, such as Diageo (LSE: DGE).
Why? An index covers the waterfront. Picking individual shares to buy could mean more concentrated risk – Diageo’s recent sales woes in Latin America are a problem. I see weak consumer spending as a bigger risk than industrially-focused FTSE 100 firms like Ashtead.
But picking individual shares could also potentially offer me more price gain potential than an index.
While Ashtead has grown 168% in five years, the Diageo share price has fallen by a quarter. I saw that as a buying opportunity for me.
The firm has strong, premium brands with no direct competitors in some cases. That gives it pricing power. And that can translate into profits — £3.9bn last year – possibly funding dividends.
At 3.4%, the Diageo dividend yield is close to the FTSE 100 average. The payout per share has grown annually for decades.
