One of the main reasons people fail to invest for their future is that they don’t know where to start. As a journalist I see that again and again in surveys, and I understand. It can seem horribly confusing, with thousands of stocks to invest in, and many more investment funds and exchange traded funds (ETFs).
Keep it simple
That’s fine if you’re interested, but it’s a massive barrier for the majority who just want to use their tax-free stocks and shares ISA but have no idea how to go about it.
Well I have a simple idea for you, whether you have £1,000, £3,000 or £5,000 to invest. Simply buy the lowest cost fund that you can find tracking the FTSE 100, the UK’s benchmark index of 100 companies, and leave your money there for years, no… decades.
This way you are buying a stake in the 100 biggest companies in the UK, which includes big names such as Royal Dutch Shell, HSBC Holdings, BP, GlaxoSmithKline, Vodafone Group and Unilever, giving you a wide spread of stocks.
You will benefit from future capital growth on the FTSE 100 plus all company dividends as well. Currently, the index yields a generous income of 4.25% a year, more than eight times the average savings account at 0.5%.
The trick is to reinvest those dividends straight back into your fund as this way you will buy more company stock and will be turbocharging your returns over the long term.
FTSE 100 constituent companies generate more than three quarters of their total earnings overseas. Effectively, this gives you a globally diversified all-in-one portfolio, priced in pounds so there is no direct currency risk. Buy the FTSE 100 and you are buying the world.
Earlier, I said you should buy the lowest cost fund you can. This is hugely important as seemingly minor charges can make a major difference to your final return over the years. The good news is that most FTSE 100 trackers no longer have initial charges, but they do have an annual management fee ranging from 0.07% to 1% a year.
That may not sound a big difference, but it can really add up over time. Say you invest £3,000 in a fund charging 1% a year and the FTSE 100 grows at an average rate of 6% a year for the next 20 years. At the end of that, you will have £7,960. However, if your fund charges just 0.07% you will have £9,495 – that’s an extra £1,535, almost 20% more. Annual charges eat up your wealth because you pay them year after year.
The iShares FTSE 100 Ucits ETF has a super low ongoing charges figure (OCF) of just 0.07%, as has the HSBC FTSE 100 Units ETF. Or you could invest in a wider spread of companies through a tracker such as SPDR FTSE UK All Share UCITS ETF which charges 0.2% a year.
Investing in the FTSE 100 is not without risk, amid signs that the global economy is slowing. There will be some volatility along the way, but it remains the simplest way to start building your wealth over the longer run.
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harveyj holds the iShares FTSE 100 Units ETF but has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.